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Thread: Member Loan Account and Deferred Salary

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    Member Loan Account and Deferred Salary

    I am a member of a family CC - as of last year (return not in yet as we have an extension). I was employed by the same CC for a number of years prior to being invited as a member. My 10% cost me R 0.00 and was a result of being such a valued member/son/brother - the person who does all the crappy jobs no one else wants to do. Part of those thankless tasks is to do the books for the CC prior to shipment to our accountant who provides us with audited financial statements. Currently this is all done as a single entry system in MS Excel but I want to move them to GNUCash or TurboCash (Busy Learning Double Entry Accounting Practice - WHEW). But that is a discussion for another thread. My problem at the moment is that I/the other members have rather large loan accounts where the business owes us money for paying outstanding taxes, business expenses, forgoing salaries, etc. over a number of years. This is NOT reflected in the books, but is reflected on a spreadsheet outside of the books. Only one member has a loan account that is reflected in the books and thence on the audited statements.

    My question is:
    "How do I LEGALLY go about adding the loan account to the books?"
    Without:
    A: Incuring a massive "PROFIT" for the CC.
    B: Falling foul of our friendly SARS Auditors.
    C: Incuring PAYE penalties and payments for the members on salaries they should have got but were not paid.

    HELP ! ? ! ? ! ? !


    I have read the "how do you deal with a business loan from the owner(s)?" thread
    (http://www.theforumsa.co.za/forums/s...ead.php?t=3101)
    and am still as clear as MUD... All advice will be appreciated.
    Last edited by Swapo; 04-Nov-10 at 11:52 AM. Reason: Add comment after reading other thread

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    Site Caretaker Dave A's Avatar
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    Was the "deferred salary" etc. claimed as an expense in the books of the company when it happened?
    The trouble with opportunity is it normally comes dressed up as work.

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    No. It was simply added to my secondary spreadsheet. I would like to add it "somehow" without getting into trouble audit wise or getting into a situation where there is suddenly a HUGE tax liability.

    Only the previous single member deferred salary and cash loans were added to the books as a liability... So, he is covered, mostly.

    For the most part... A lot of the cash loaned to the business was not recorded as it was an in and out payment. Ie. I would pay the phone bill with my credit card, and next month (when the business had the cash available) would repay myself and record the repayment in the books as the actual payment to the provider, matching the invoice, albeit a month late. Dodgy accounting practice, but... ignorance is bliss. No-one lost money on the deal and for all intents and purposes the payment was made to the person required.

    What has begun to worry me is that there is always something that cannot be accounted for using my single entry system and the loan account of the principal member is slowly being eroded - mainly through poor accounting - as he now absorbs the costs of any shortfall from his loan account.

    Ja, I can hear you!!! It is a MESS, but two passed SARS audits later it is not as messy as it should have been. I just want to clean it up. SARS is getting better equipped and I need to make sure my books are like the Bishops Wife - Beyond Reproach.

    The books for 2010 and 2011 are still open. Is there wiggle-room anywhere?

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    Site Caretaker Dave A's Avatar
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    The expenses (such as telephone) that have been expensed and the member repaid are effectively done, then.

    Where a member is owed for an expense that hasn't been captured yet, you'd process that expense and add to the tally owed to the member (the basics of double entry accounting).

    What might prove a bit tricky is claiming back pay on salaries not expensed yet. Oh sure, you can put in the entries, but salaries attract things like UIF, SDL (if payroll over R500k per annum), workmans compensation levies and PAYE!

    It might be an idea to rather track this off the books as salary sacrifices, with some sort of agreement as to how this will be caught up in future. Backdating the expenditure in the books might have consequences (penalties ).
    The trouble with opportunity is it normally comes dressed up as work.

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    Thanks Dave...

    It is too late for tears. Our ignorance has COST us big time. One very good reason to get everything cleaned up.

    The way I read the legislation (now), along with your kind advice, is thus:
    any "deferred salary" must attract taxes/levies etc. in the month it was accrued. The "deferred portion" can then be paid out to the member later without attracting taxes as it has already formed part of their taxable income for which the various liabilities have been met. The monies loaned for expenses can simply be refunded as is - with the relevant entries of course. We initially kept it out of the books to limit the tax liability; thinking I could tax it later when it became payable - I see now that this is a HEINOUS and COSTLY mistake - not to mention a dubious legal path to follow.

    Any ideas as how I can make this work??? I am thinking, as it is a wholly owned family business, that it would be possible for me to construct a new "salary" regime simply for the purpose of getting the monies paid back. I can then reduce the "off-book" loan account by the applicable amount. Whether to split the tax liability between the two parties "off-book" is another question. While legally acceptable, it would attract "school fees" equal to the "higher" tax rate of the individuals being so "reimbursed". THAT is an EXPENSIVE MISTAKE.
    While not quite a moral solution, I think that this solution would be a legal one, in that the CC is entitled to pay an employee any figure it cares to regard as fair value for the service the employee provides.

    DOH!!!

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    I know nothing about deferred salaries, so can't help there.

    The only way I would know how to rectify this situation is to start paying larger salaries from now on, so that they catch up with your spreadsheet accounts.

    If you want to have earned the money you will have to pay the tax. As it stands you do not have the loan values and you have not paid tax (whatever your spread sheet may say). To rectify this now in one go would result in a massive tax bill and probably even a higher rate if you get pushed into higher tax brackets.

    Rather spread the correction over the next few years so that it smoothes out the tax cash outflow.

    Get this down in writing with all members so that it is clear that the payslips are not reflecting their actual salaries but rather an inflated one to catch up with what you want it to be. Once the catch up is done, salaries can go back to actual values - and everyone needs to be aware of this.

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    I think we're all pretty much on the same track as to the issue and the options to resolve it, by the looks of things.
    Quote Originally Posted by Swapo View Post
    The way I read the legislation (now), along with your kind advice, is thus:
    any "deferred salary" must attract taxes/levies etc. in the month it was accrued. The "deferred portion" can then be paid out to the member later...
    That's why I suggest the option of a salary sacrifice

    I suppose you could compare the penalty cost of declaring the salaries as being earned in the previous tax year vs loading up the salaries going forward, but it's going to take quite a marginal rate jump to overcome 10% penalty + interest on PAYE, UIF and SDL. You probably have also filed the 2010 Workmans Compensation return.
    Quote Originally Posted by Swapo View Post
    Whether to split the tax liability between the two parties "off-book" is another question.
    Not sure I get the issue here. The extra income would be taxed at the marginal rate of the taxpayer regardless of whether it falls into the current year or last year. With threshold changes, there could even be an advantage in the salary being taxed in a later tax year if the amounts aren't too significant.
    The trouble with opportunity is it normally comes dressed up as work.

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    Ignore the comment about splitting the tax liability "off-book". I was just thinking aloud.

    From here on in... I think I need to finalise the books for 2009/2010 and 2010/2011 to date and then sit down and discuss the options (which is essentially to suck it up and spread things out over the next year or two or three) with the other members. However we decide to skin this cat is going to cost in taxes. DOH!!! I can now see how the 1K a month to get some-one to do this all for you would have been money well spent (and it is deductable under accounting/professional fees). I am talking to an accountant who specialises in small businesses on monday am and then I am off to our auditers who also offer a monthly service to discuss the way forward with them.

    @ DaveA and Bus Fact - THANK-YOU!!!
    I am now armed with more caution and some pertinent information.

    I hope this thread can help some-one else to NOT make the same mistake.
    But... Cashflow kills and some stupid decisions were made to try and eke it out, and now we end up here costing us a whole lot of extra money in taxes - all for trying to cut a corner or two.

    Double DOH!!!

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