Sale of minority interest in CC

[Briano]

You are right Dave.

[Dave A]

Relieved to hear that. The situation seemed to have some potential if the numbers were in the right places.

[CLIVE-TRIANGLE]

This can be a minefield, so be careful

But the real problem is the underlying principle that the loan is to lend the member financial assistance, regardless of how it is structured

[Dave A]

Agreed. Although I'd rate avoiding a First Strut situation a more significant hazard than SARS getting grumpy about the ownership structure

[Briano]

How does SARS treat intercompany loans ie between various CC's with a common "connected" member? Does interest have to be charged on these accounts to avoid deemed dividend tax and is the interest tax deductible?

[Dave A]

How does SARS treat intercompany loans ie between various CC's with a common "connected" member? Does interest have to be charged on these accounts to avoid deemed dividend tax and is the interest tax deductible?

If I may offer some guidance by answering thus:

By my understanding, SARS does not show interest where the company owes money to an owner or director.
SARS certainly does seem to take an interest when the owner or the director owes money to the company.

Where there is a loan account between two companies without direct ownership connections one into the other, SARS might well take the view of routing the loans via the ownership for tax consequence assessment purposes, which by my understanding is pretty much what Clive has alluded to as a risk in his posts above.

If you did not reflect the loans via the common ownership or directorship, the red flag would probably be if the value of the loan exceeded the reported annual value of transactions between the connected parties in the financials (at best), although I would guess it could be possible that there might be a percentage threshold that might flag a closer look.

I can also add that I am in exactly this position, with a control account recording the transactions between two companies which share a common directorship. And I can advise that my auditors do take a very close look at it. Fortunately it quite clearly isn't a long term loan account, with multiple perfectly legitimate transactions happening every business day, and an annual volume that far exceeds the balance that ends up being reflected in the balance sheets of the respective companies.

It's probably worth also pointing out that the days of an auditor or financial reviewer giving a friendly view on such things (based on a "didn't look, couldn't tell" defence) are probably over - SARS seems to have successfully brought significant new culpability to bear - to the point where I think we're probably paying SARS's policemen rather than purchasing professional tax / financial reporting assistance and guidance nowadays.

So if it looks like there should be an interest charge, I do suggest you raise it and have a full blown loan agreement in place.
And avoid long term loans between connected entities.

[CLIVE-TRIANGLE]

By my understanding, SARS does not show interest where the company owes money to an owner or director.
SARS certainly does seem to take an interest when the owner or the director owes money to the company.

Exactly Dave. It is tempting to over complicate the scenario, whereas if you imagine that there is only one entity it becomes quite simple, and as it turns out that is precisely what SARS will do. The issue is simply whether the expense (interest on loan to the property cc) is incurred in the production of income, and thus deductible. It isn't. The next hurdle is that it constitutes financial assistance to the member, and that's where the deemed dividend issue raises it's head.

To me the solution would be to convert the cc's to companies. The property owning entity is already an investment company (I presume it earns rent) and all that is required is that it acquires the minority interest in the other cc's / companies, and does a buy-back of it's own shares held by the minority shareholder.

In this way there is no assistance to a shareholder and based on the expectation of a dividend, at least some if not all of the interest would be deductible. Control is still vested in the majority shareholders, which is what it is really all about.

[Briano]

Thanks Dave. Sound advice.

[Briano]

Thanks. Good advice Clive.

[Jddt]

Interest should be charged at the prime overdraft rate on a members debit loan account in order to avoid STC and to avoid it as been seen as a deemed dividend by SARS.

STC applies to CC's in respect of dividends declared and deemed dividend provisions as above.