Wise Old Owl – Deemed Dividend Madness

I refer to the article by “Wise Old Owl” on “Deemed Dividend Madness” in The Sunday Times FT of December 3.

I am compelled to comment on this article because it is an excellent example of shoddy thinking. The article reeks of personal animus but what concerns me is the lack of logic that it betrays.

The letter argues that a ‘kidney punch’ has been delivered against the private sector by the budget proposal that a tax of 15% should be levied on the difference between the actual dividend paid and one third of the distributable profits after deducting capital expenditure, if the dividend payout is less than 25%.

The author grants that there was already provision in the Inland Revenue Act for an assessor to deem that the entire profit of the company was a dividend that could be taxed at the highest rate of personal taxation, 35% if he decided that a reasonable distribution of profits had not taken place.

Even though the author of this diatribe is suspected to be an accountant he has been unable to work out that a rigorous application of Sec. 66 of IR Act No 10 of 2006 which would result in a penalty of three times more tax than what is proposed in the Budget. The kidney punch, if any, was therefore delivered when Sec 66 was enacted many months ago. Wise Old Owl though an accountant had not been alive to it.

It is difficult to understand why a dividend payout of 25% would lead to catastrophic financial ruin as he and various other critics of the budget proposal have claimed. They seem unaware that a number of leading companies such as Hayleys and John Keells have made dividend payouts of 68% or more without in any way sacrificing their expansion and diversification. The Treasury Secretary when addressing a recent seminar pointed out that profits should not be the only source of funds for expansion. Other sources that are regularly tapped by companies, if profits are insufficient or the planned expansion is very large, are debentures, bank loans, and rights issues.

Our financial wizard the Wise Old Owl has not heard of this; or the companies he defends so passionately have such poor reputations that they cannot raise debentures or loans or have rights issues. His insolence is so great that he has stated that the budget proposal has placed a knife in the hands of a ‘monkey’ to ‘cut the windpipe off the private sector’. It is not clear whether he is referring to the President, the Secretary to the Treasury or the Commissioner-General of Inland Revenue as the knife wielding monkey!

All shareholders of listed companies are grateful to the President for saying categorically that companies should aim at a 50 percent payout (not a 50 percent dividend). I feel particularly gratified because I have been saying this for years. In the context of the best practice of companies noted for their corporate governance, a reasonable payout would, in my opinion, be 33 1/3% or more. Anything less would be unreasonable.

Many companies have achieved the President’s target of 50%. By making 25% the minimum dividend payout before tax is levied, the Budget Proposals have been more lenient than they should have been. By reducing the rate of tax from 35% (under Sec 66) to 15%, the proposals have been far too kind to those companies that have been abusing shareholders over the years.