SARS deemed dividend

[QRS]

Hi

Please assit with the following question:

Scenario
_________

Close Corporation A - Member is Mr. Smith
Close Corporation B - Member is Mrs. Smith (Married in community of property with Close Corporation A's member)

Close Corporation A loaned R 1000 000 to Close Corporation B, interest free and no terms of repayment.

The financial statements were drafted as a loan. SARS then audited Close Corporation A, and then deemed the loan to be a dividend.

We have to amend the Annual Financial Statements accordingly.

Close Corporation A - Debit dividends paid, credit loan account. Raise 10% to the income statement (Debit) and credit Receiver of Revenue account.

Now, the tax has already been accounted for.

My question (1) is Close Corporation B - How do we account for the dividend? It cannot be dividends received, as Close Corporation B is not a member / shareholder of Close Corporation A.

My question (2), should it be regarded as dividends received in Close Corporation B, if the funds are eventually withdrawn by the Member of Close Corporation A, will there be another STC liability?

Please assist as a matter of urgency.

Kind regards


QRS

[CLIVE-TRIANGLE]

It is a deemed dividend for tax purposes only and does not require that you treat it as a dividend (which is not what a loan has in mind anyway!)

Just debit tax expense and credit tax liability in CC A.

As from 1/04/2012, dividends tax will only be charged on the difference between the “market-related rate” and what the borrower actually is charged. “Market-related interest” refers to the “official rate of interest” as defined in the Seventh Schedule to the Income Tax Act which is, in the case of a loan which is denominated in ZAR, a rate of interest equal to the South African repurchase rate plus 100 basis points, and is no longer STC but a withholding tax.

That also means that you can't claim STC credits if that loan is repaid in the interim, it's just gone.

[QRS]

Thank you for your reply Clive. Does the client however have the choice to amend the financial statements accordingly, and if so, how is the accounting treatment in CC B?

[CLIVE-TRIANGLE]

SARS have used the "connected person" principle, therefore the dividend was deemed received by the member of CC A, not by the member of CC B.

Being married ante nuptial has no effect in the concept of connected person.

There is therefore no effect on CC B, other than reversing the loan entry.

If you do opt to reflect a dividend, remember that (in your example) the R100,000 is net after deducting STC, so the dividend is (net+STC)

[QRS]

Thank you Clive