[Question] Members loan account

[vtnoracle]

Can someone assist me pleasssse, I have to raise a 2.5 million interest free members loan account from the company to the member. This is a result of an audit finding and starting from the previous financial period.

I have a set of of financial statements for the current period ready but just dont know how to incorporate the debt in the balance sheet. What contra account is to be used?

[Dave A]

What contra account is to be used?

That has me confused too. How was the loan originally captured?

Also, what is the repayment period of the loan?

[BusFact]

The Contra account depends on where the loan came from / why it currently exists.

Eg: If paid from the bank account, the contra is obviously your bank account.
If paid by another member, then their loan account is the contra.

I gather your situation is more complicated, but your answer lies in its origins ... and "thin air" doesn't count

[vtnoracle]

That has me confused too. How was the loan originally captured?

Also, what is the repayment period of the loan?

the loan is payable on demand, depending on availability of cash. what happened is there are personal bank accounts of the member linked to the business account and there was more money going out than into the business account, and auditors decided that it should be treated as a fringe benefit and taxed.

I know that the loan account should be raised a debtor on the balance sheet but i dont know what cotra account to use?

[Dave A]

In terms of the management accounts, tracking the value and movements in a member's loan account (other current asset or similar in this case) is ordinarily good enough.

It's when it comes to the drafting of financial statements that things can get a bit dramatic. It has to be clearly reported as a transaction with, and balance owed by, a connected party and there'll have to be a fairly detailed note on the subject. Ordinarily your auditors will take care of that when they draft the final financial statements.

May I also comment that in most cc scenarios this is a less-than-ideal situation. Loans to members can have some ugly consequences, let alone the "interest free" bit. Depends how significant 2.5 bar is in the overall situation, I guess.

[Petrichor]

May I also comment that in most cc scenarios this is a less-than-ideal situation. Loans to members can have some ugly consequences, let alone the "interest free" bit.

@Dave - would you mind elaborating on this? I also have a loan account in my CC and just want to make sure I am not doing something I am not supposed to be doing. I am planning to pay back a portion (25%) of the loan to myself before end of this financial year. Interest free as well.

[Dave A]

From a tax point of view, I'd prefer it if a tax fundi went into the specific possible tax effects, but I'd keep a wary eye on value extraction tax related issues.

From a financing point of view, it's a bit of a double whammy. Banks may discount the value of the "asset" in the hands of the company, which will hammer total debt to equity ratios. And at the same time recognise the full liability in the hands of the member, reducing your nett capital worth, hammering your own total debt to equity ratios and value as surety.

Then there's the possible consequences if there are other members/partners.

Far cleaner if the member raises their own finance for their own stuff and leaves the cc out of it i.m.o.

[Blurock]

Have to agree with Dave. From an investors or financier's view the loan to a member/shareholder will reduce the shareholder's equity in the company. This may make it difficult for the business to obtain working capital finance. Withdrawing cash funds from a business also has grave cash flow consequences affecting its operational effectiveness.

On the other hand, if the owner/member/shareholder gave a loan to the company, it may be regarded as an investment or commitment to the well-being and future growth of the business.

[Petrichor]

Thank you for clarifying. In my case I gave the loan to the company and are now, after 2 years, starting to see the real benefits from the capital investment I made in the business back then.

[Dave A]

In my case I gave the loan to the company and are now, after 2 years, starting to see the real benefits from the capital investment I made in the business back then.

There's a huge difference between giving the company a loan, and taking a loan from the company

[Petrichor]

Thanks Dave.

I only realise now that I misread the original post! Did not see that you were referring to a loan to the member. In anyway, good information which I have never thought about before, so worth the discussion in my opinion.

[BusFact]

the loan is payable on demand, depending on availability of cash. what happened is there are personal bank accounts of the member linked to the business account and there was more money going out than into the business account, and auditors decided that it should be treated as a fringe benefit and taxed.

I know that the loan account should be raised a debtor on the balance sheet but i dont know what cotra account to use?

Either I don't fully understand what has happened or this setup sounds very strange. I can't quite figure out how he managed to draw out R2,5bar for what seems to be personal expenses. If he has done this, how did the cash get into his personal account in the first place? If its drawn from the main business account, then the bank account is your contra. But I'm obviously missing something.

I'm also under the impression that when a member has a loan from a cc for a period of more than one year, there is the risk that SARS will see that as effectively being a dividend payment. It may have something to do with whether interest is being paid or not. I'm with Dave on saying this is more for a tax expert, and my comments are largely hear say.

Ultimately if we forget the creative accounting and tax dodges, and call a spade a spade, it seems this member has really been paid a R2,5M extra salary and it should be treated as such. However I'm sure a decent tax consultant could wangle a better solution.
Am I right in saying that the member has effectively

[mikeytdurbs]

Can someone assist me pleasssse, I have to raise a 2.5 million interest free members loan account from the company to the member. This is a result of an audit finding and starting from the previous financial period.

I have a set of of financial statements for the current period ready but just dont know how to incorporate the debt in the balance sheet. What contra account is to be used?

Accounting:
It sounds like your balance sheet is not balancing and 2.5 million cash is missing. No contra account will be needed as it appears bank has already been adjusted. It sounds like the 2.5 million will be the balancing figure.

Tax:
Low Interest or Interest Free Loans
Paragraph 2(f) of the 7th Schedule prescribes that a taxable benefit shall be deemed to have been granted if a loan (other than a loan for purposes of paying any consideration by the employer in respect of a qualifying equity share, the payment of any stamp duties or uncertified securities tax payable in respect of that share or a loan in respect of which a subsidy is payable to the borrower by the employer), has been granted to the employee, whether by the employer, by any other person by arrangement with the employer or any associated institution in relation to the employer.

Value to be placed on the benefit in terms of Paragraph 11 of the 7th Schedule is:
The amount of interest that would have been paid on the loan during the tax year if any interest had been paid at the official rate, less the amount of interest (if any) actually incurred by the employee.

Where an employer provides loans financed out of his / her own funds to employees, the taxable benefit will be the amount of interest that the employees would have paid in respect of the tax year, if they were obliged to pay interest at the official interest rate.

No value shall be placed on the benefit derived in consequence of —
- The granting of a casual loan or loans if the aggregate of such loans do not exceed the sum of R3 000 at any time. The loans contemplated in this exclusion are short-term loans granted at irregular intervals to employees and not all loans merely because they are less than R3 000. A taxable benefit would arise if the loans were granted on a regular basis to all employees or a certain category of employees notwithstanding the fact that the loan does not exceed R3 000.
- The granting of a loan for the purpose of enabling the employee to further his / her own studies.
- If a financial institution such as a bank provides loans to its employees at the same rate as to the customers of the institution on the same conditions and under the same circumstances, no taxable benefit will accrue if such customer rate is below the official interest rate.
- If a low interest or interest free loan is provided to a director of a company or to a member of a close corporation, no taxable benefit will accrue if such loan is, for example, provided only as a result of the director’s share holding and not in respect of any services rendered. In such a case, the interest on the loan will not be deductible in the hands of the company or close corporation.