Loan account repayment

[Basment Dweller]

I have a loan account against my company owed to my mother for the purchase of some properties that were transferred into my company.

How does this work from an accounting perspective?

Since it's my mother that I owe the money to and not the bank, I have no pressure to repay this money since my mother gave me these properties.

Since my mother is a beneficiary of the trust which owns a portion of the company, can I pay her share out as a loan repayment as opposed to declaring a dividend through the trust or withdrawing a salary?

The lent money will be paid back to her tax free right?

Are there any other benefits to being in this situation that I can exploit?

[GHopfeldt]

Hi
Firstly it seems it's the business that owes your mother and not you. You say property was transferred to the company. If I'm wrong correct me, but it's slightly confusing the way you've written it. The business may repay your mother as a loan re-payment. Please note this this has no profit impact unless your mother is charging interest in which case the interest will be an expense to the business and an income to your mother. You can't pay her share of profit as a loan re-payment and yours as a dividend though. If there are dividends paid then you all receive them. You can receive a salary and your mom none though. Then you use cash to re-pay your mom. Any money paid to your mom against a genuine loan, which this is, is not taxable. She's only taxed on the portion that is interest. And even then if she's under 65 the first R23 800 of interest is exempt and if she's over 65 the first R34 500 is exempt. I use a similar structure in a business of mine. Can't think of other benefits to exploit. I would advise there being interest on the loan though. SARS gets twitchy when interest isn't charged.

[Basment Dweller]

Understood thanks for the feedback. What I meant was, my mother will receive income as a loan repayment tax free (if no interest is charged) as opposed to declaring a dividend as beneficiary of the trust. As for the interest repayment, was planning on not charging interest since my business is not a financial service provider and don't want my mother to incur taxes on the income.

[Justloadit]

That simply means your mother is getting her money back for the loan on a monthly basis, and not an income, she may use this to supplement her living expenses, but it is not an income. Income requires you to pay tax on it. The original loan was made from already taxed income.

[GHopfeldt]

Being a financial services provider or not doesn't make a difference here. Your mother has essentially lent the business money and is entitled to charge interest. I would advise she charge a market related interest otherwise SARS may view this as a transaction that wasn't done at arms length. While I can't remember all they could enforce for one they could potentially declare it a donation and charge donations tax. While it's unlikely the point is SARS look at these things negatively. You'll notice when completing tax returns SARS alway ask about interest free loans and there is a good reason for that. Probably it's ok but be aware that SARS look at these things. As an example I can guarantee that if your business ever loaned money to you without charging interest you would pay deemed dividends tax. While this is not quite the same, SARS look to tax you wherever they can.

[CLIVE-TRIANGLE]

There are a couple of inconsistencies in SARS approach to loans. This is how they seem to view it:

Loans from a company to shareholders / directors - charge interest at least equal to the SARS official rate, or else they will regard the absence of the interest as a deemed dividend. The rationale seems to be that the company omitted income; there being no interest exemption for companies. Also, the loans are usually funded from operating activities, or from interest bearing borrowings.

Loans from shareholders / directors to companies - does not seem to be viewed in the same light. I assume because it would decrease the company's taxable income, and because of the exemption available to natural persons.

Loans between group companies - seems to be ok, I assume because income for the one is expense for the other.