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Thread: Close Corporation Questions Relating to Member Salaries and Company Vehicles

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    Close Corporation Questions Relating to Member Salaries and Company Vehicles

    Hi

    I have recently bought into an existing close corporation which has been around for about 18 years. There were originally four members, now there are only two remaining. I was offered a 10% ownership within this entity at a specific amount. Based upon the fact that I was employed within this entity for a long period, I rushed into the deal without understanding the workings around the administration of the entity.

    One year has passed since I have joined, now there are items cropping up which I have questions about..

    1. Members Salaries - I was informed that members salaries are not seen as expenses within the financial statements, therefore they are not tax deductible. It was further explained to me that the Expenses (excluding Member Salaries) will be deducted from the Revenue to give the Profit of the CC before Tax. Then, tax will be taken out, leaving the Net Profit which will be shared amongst the members according to their shareholding. In my case this will be 10%, my salary will then be deducted from this amount and the remainder can be paid to me as a dividend. So,

    E.g. Revenue R10 000 000 - Expenses R5 000 000 = Profit R5 000 000 - Tax (28%) R1 400 000 = Net Profit R3 600 000

    My 10% = R360 000 - (Member Salary R25 000pm * 12 = R300 000) = Dividend Pay-out of RR60 000

    2. Company Vehicles - When I came into the company the majority shareholder (75%) had a company vehicle. I was informed that based upon my 10% shareholding it would not be worth my while purchasing a vehicle since the value of the vehicle would be linked to the 10% ownership. This is base don the fact that the value of the vehicle (repayments) would be deducted from my R60 000 dividend which would not work out.

    Any advise on the above?

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    Hi Johnk
    Based on your point 1, it sounds like there is an association agreement in place, or at least common agreement on the mechanisms to appropriate profit. What they are saying is that:
    1. Members salaries are in fact drawings and therefore not expenses.
    2. All after tax profits profit are declared as dividends.
    3. Drawings are deducted from the payment of dividends.

    The advantage to you is that you would have no tax liability because the dividends comprise after-tax profits and are themselves net of the withholding tax on dividends.

    What is unusual is that in most cc's members also perform jobs as it were, and receive remuneration for that work and that remuneration is a normal operating expense as compensation for work done. Dividends are then paid on the remaining profit, which comprises the return on investment.

    If your "salary" is subject to PAYE then the above does not quite make sense; it only make sense if the monthly payments are regarded as drawings.

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    Isn't there going to be a problem with taxation on the paid dividends (which doesn't seem to be provided for in the example)?

    The other question to ask - assuming the majority owner stops working in/on the business, what happens then?
    The trouble with opportunity is it normally comes dressed up as work.

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    Hi Clive

    Yes, in this case I do perform duties/functions within the CC for which I receive remuneration. The remuneration is taxed as per a normal salary, not structured to that of monthly withdrawals. I also know that my salary has PAYE deducted form it.

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    Hi Dave

    Yes, my example did not cater for the tax portion on the dividend, which would be 10% from what I can gather.

    Also, I would assume that if the majority owner stops working, he would expect to be bought out by the remaining shareholders..

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    Hi JohnK

    How do you account for Income Tax on your Member's Salary? The whole agreement seems strange and I am just trying to understand a little more before assessing the tax inefficiencies of it.

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    John
    1. Members Salaries - I was informed that members salaries are not seen as expenses within the financial statements, therefore they are not tax deductible. It was further explained to me that the Expenses (excluding Member Salaries) will be deducted from the Revenue to give the Profit of the CC before Tax. Then, tax will be taken out, leaving the Net Profit which will be shared amongst the members according to their shareholding. In my case this will be 10%, my salary will then be deducted from this amount and the remainder can be paid to me as a dividend. So,
    This statement is then incorrect. If members' salaries are taxed, then they are not drawings, and if they are salaries then they are a deductible expense both in the Income Statement of the financial statements, and in the Income Statement of tax return. Nor is there an add-back anywhere.

    The profit is then taxed at 28%.

    The remaining profit can then be distributed as a dividend, according to the % holding. The cc is obliged to withhold 15% as dividend tax and the members are paid the net thereof. The dividend tax is a tax that the members pay, but the cc is bound by the tax provisions to deduct it and pay it to SARS within 21 days.

    Ignore the tax issue for the moment.

    The cc may use any method it wishes to arrive at a dividend, provided the cc satisfies liquidity requirements'.

    However if I understand correctly, the method in use does not satisfy the requirement that dividends are shared according to the equity ratio.

    The excel attachment is an example. Change the numbers and see what comes up.
    Attached Files Attached Files

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    Hi Mike, well I pay income tax as an individual monthly as per my payslip..

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    Hi Clive should line C14 be "Profit before Remuneration" or after?

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    Before deducting it from Revenue - "Profit before deducting Remuneration" (or else deduct it, but then add it back?)

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