Determining owners salary

[CTS]

I started my private company a few years ago with a directors loan to the company and 100% shares.
I pay myself a small salary just to cover home loan and a few other expenses, and my wife more so she can pay her car and keep the family going.
The business is growing steadily over time and has no overdraft or bank loan, only director loan outstanding.

the question is..
I want to buy a new car but are paying myself to little to get a loan, what would be the best options to go about it?

If i pay myself a bigger salary, I'm scared that I take to much operational cash that the business might need.

I was thinking of paying myself more so that I have a better payslip to show creditors, and then loan money back to the business if it needs it.
Will this work, or are there other ways to do it.

I was considering buying a company car trough the business, but the bank said my business to young (5 Years)

Any advise please

[dellatjie]

I am not sure if this is acceptable any more, but in the past auditors used to issue a letter, stating the monthly drawings of the client, and based on that, finance was evaluated?

[Dave A]

If i pay myself a bigger salary, I'm scared that I take to much operational cash that the business might need.

I was thinking of paying myself more so that I have a better payslip to show creditors, and then loan money back to the business if it needs it.

It's that little combination that troubles me, and is probably why you are having problems getting finance. No amount of playing with book entries is going to change the cash generation ability of your business* - and it is the cash generation ability that determines affordability.

My suggestion would be: If you base your car purchasing decisions on excess cash flow over a sustained period, you will get ahead of the game. If you base your car purchasing decisions on what you want rather than what you can confidently afford... well, that's why there are so many people with lousy credit records.

*There are exceptions, such as tax efficiency measures to keep what you pay in tax to a minimum, but these you should be doing anyway.

[Marius1975]

Hi, I've got a question, my brother and I started a cc about 3 years ago, our turnover pm is about R300k with a net profit of about 110k pm - We pay ourselves R30k each pm with pension and medical, car, food and petrol benefits. We have saved up about R900k in the business savings account and the banks loves us and keep on offering us loans for things we don't want. I think the TAX on our salaries are all ready between 28-30%

Back to my question, we want to start taking more money home and want to pay as little TAX as possible. What would the best way be of doing that? I've read about dividends but don't really understand it. Lets say we want to earn R40k each per month, what would the best way be to get that our of the business?

[Justloadit]

Nice business you have there.

In my opinion, dividends in a CC create more hassle than benefits, as the CC pays tax on profits, and then what is left is distributed as a dividend. On receipt of the dividend, if I am not mistaken is tax free, as the tax was already paid by the company.

Once you in the arena of good income, there is very little one can do to reduce the tax bill, as the income places you into a higher tax bracket. The most cost effective may be to take it out as a salary.

Some of our other forum members may have better better advice.

[Marius1975]

Thank you JLI, that sucks, bleh. The TAX is crazy, even the TAX on our profits are ridiculous but we don't want to start creating extra expenses simply for the sake of making less profit to get the TAX down. The only sensible expense is probably higher salary then..

[CLIVE-TRIANGLE]

Hi Marius. The company's effective tax rate is 38.8% (maximum dividends)
So while your effective rate on salary is less than that, paying salary makes more sense. Once your effective rate equals that of the cc, then it's another matter.

[Basment Dweller]

This is an interesting topic...dividends are expensive to extract so what strategy do you take with your business?

1.) If you don't spend the money on expenses, then it gets taxed away anyway
2.) Expense away all your money and make no profit
3.) Declare a profit at 28% and reinvest the money back into the business
4.) Make a large profit, get stiffed by SARS 38,8% and have more cash in your personal bank account but have less money for the business to grow

[Justloadit]

There is a thing called a loan account. You make a book entry paying you wages, you pay the PAYEE, alternatively provisional tax, and it remains in the company as a loan by you to the company. The company then always runs at cost or a loss, depending on your preference, but has working capital. You can take the capital out when ever it is liquid and diminish the loan account, with out then having to worry about any tax, as this is already taken care off.

The only disadvantage is the day you wish to sell the company, the purchaser may see the business as a bad investment because it makes no profit. This is where you have to show the purchaser where the profit of the company lays.
The other disadvantage is that this is only good for small companies, or sole owners. When partners are involved, you need to have a memorandum of agreement that payments as wages are proportional to share holding, and that there must be an agreement by all when the loans are repaid, or else every one pulls there money out and the company can not trade due to lack of capital, or alternatively only one shareholder keeps the company alive with his loan account.