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Thread: Skills Development Levy - Liability

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    Skills Development Levy - Liability

    Hi guys. This is my first post on this forum and I'm sure there will be more so here goes.

    Me and my partner have a small company and we employ two people. Now my question relates to the liability for paying SDL. Per definition
    The Skills Development Levy (SDL) is payable by all employers with an annual payroll of R500 000.00 or greater.
    .

    Now me and my business partner's annual salaries are greater than that amount, while the annual salaries to the rest of the employees are less than that amount. Are we liable to pay SDL since our salaries to ourselves pushes us over that threshold? It seems strange since most small companies that will consist of only owners that have a payroll greater than that amount will then be liable to pay SDL.

    If you can just clarify this for me it will be great.

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    Pay yourself a minimum salary and declare the rest as lease fees, license fees, interest refund, dividends, capital repayment etc.
    You declare the total on your personal income but the company only has a minimum wage bill. ;-)
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    I am just a little worried about declaring a dividend, as that will attract dividends tax? Furthermore, interest above R23 800 will attract income tax? Not sure wynn's solution will work...

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    Quote Originally Posted by dellatjie View Post
    I am just a little worried about declaring a dividend, as that will attract dividends tax? Furthermore, interest above R23 800 will attract income tax? Not sure wynn's solution will work...
    Yes, the lease I can create a contract for. Not sure about license fees, what could I charge my company license fees for?
    Interest refund could work up to a point, since we do have shareholder loans. But it seems there are 1000s of court cases where companies have declared the interest on the loans as an expense and they were challenged. Some of them won and some didn't. If you can't declare the interest as an expense you are going to pay that 28% income tax again...

    The dividend would have to be after profits right? So I'd have to declare profits, pay 28% tax, and then after that pay the 15% dividend tax. Also I'm not sure on an personal income level, does one then pay income tax on the dividends received also?

    Capital repayments, I'm not clued up on the accounting terminology but I assume that is like repaying the shareholder loans? We have substantial shareholder loans but I don't think long term liabilities like that can be declared as an expense therefore the company will have to pay 28% tax on all the monies that is repaid back to us.

    Please correct me if I'm wrong in any of these assumptions.

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    The company, as a person, is liable for tax on it's net profit. It's net profit is arrived at by deducting from it's income, allowable expenses. So that's simple and yes it obviously excludes loan or any liability repayment.

    Directors, like anybody, are liable for tax on their taxable income, which excludes payments received iro repayment of loans.

    At that point, assuming the company has profits after tax, it may wish to declare dividends to shareholders. Those dividends are taxable in the hands of shareholders at 15%. The company is responsible for withholding the 15% tax and paying it to SARS. It's at that point that you should ask yourself if there is any point in extracting dividends when you could actually repay your loans.

    You most certainly can charge interest on the loans. To avoid issues you should have a loan agreement in place and actually make repayments that covers the interest charge and reduces the capital balance. The full interest is then an allowable expense of the company and is income in the shareholders hands, after deducting the annual exclusion.

    Any fees or income or benefits paid to directors is disclosable in the financial statements of the company and, depending on size, in the company's tax return. Any income or benefit received by the directors is taxable in their hands. Remember too that directors are automatically provisional tax payers and also have to submit a statement of personal assets and liabilities as part of their personal tax returns. The reason is obvious; it is to detect growth in net wealth that cannot be substantiated by declared income.

    With all of that in mind, whether or not to draw a salary depends on the numbers. Personal income tax rates are a sliding scale, whereas company is a flat rate. So you actually have to crunch the numbers to see at what point there is a saving to be made. But generally, paying tax on any sort of income whilst there are substantial loans due makes no sense.

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    I think that "tax efficiency" can become quite complicated and IMO should rather be kept as simple as possible.

    The OP though refers to SDL specifically. Now, surely it makes sense to rather declare director/owners income as rent/hiring/interest/licence fees whatever, just so that it does not add to the payroll amount and make the company liable for SDL.

    Don't fiddle with the tax - changing what you call the income doesn't change much in terms of tax for most people, but I can't see what the problem would be with staying away from the SDL limit.

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    I think that "tax efficiency" can become quite complicated and IMO should rather be kept as simple as possible.
    Agreed, Assuming the company is not an SBC, then only when salary exceeds R700,000 does dividends become a viable option.

    The OP though refers to SDL specifically. Now, surely it makes sense to rather declare director/owners income as rent/hiring/interest/licence fees whatever, just so that it does not add to the payroll amount and make the company liable for SDL.
    Agreed. But never mind the SDL; paying dividends or salary while there is an LAC to draw against makes no sense. Once that is repaid revisit the issue.

    The banking and credit realities some times necessitates drawing a salary. Banks don't easily regard repayment of a loan account as income, and directors of SME's almost always find themselves obliged to produce the sacred payslip with matching deposits in their bank account.

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