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That is basically it, in a nutshell. One year, two years ... no issue.
I don't follow what you mean regarding the PAYE bit?
Bear in mind the cumulative taxes; 28% + 15% which is 38.8%. Paying a salary is bound to be more effective.
Wow, thanks for reply. I just mean that instead of paying PAYE every month that a salary is paid out, you can pay the full basic amount to the employee without deducting PAYE, just charge interest at prescribed rate and declare a dividend at year end. The rates come to a similar number, but the cash flows are better. Hope thats right.
Haha. Be careful because there are ample anti-avoidance measures. The thing must taste like a loan, and smell like a loan!
In the new dividend tax thing, it's not the loan that is deemed a dividend, it is the difference between interest charged and SARS' rate, currently 8.5%
So there is little issue with the loan per se.
So the cash flows are the company pays over the net amount to the employee's loan account, doesnt have to then pay PAYE over that month, charges interest and one fine day a few years later, the company can declare a dividend to zero the loan. It will pay higher tax at year end as it doesnt get the PAYE portion deducted off income, but atleast it helps out on the cash flow situation if the company is tight.
Is this anti aviodence stuff?
Anton, for this purpose of the tax act, a distinction is drawn between an employee and a person who has a vested beneficial interest in the shares or members interest. It includes "connected persons" which in the act is pretty inclusive.
It cannot be a "normal" employee loan in the absence of a formal loan scheme to which ALL employees have access.
You could definitely not do this with regards to an employee - part of what determines an employee is the fact that he earns remuneration. It cannot be both. If you attempted that then it would be avoidance.
In the absence of those factors it is a shareholders loan / members loan. You would need to have a loan agreement in place with a repayment plan. The repayment plane would not be able to rely solely on dividends, which may or may not happen.. If a dividend was declared and it eliminates the loan, that would be incidental.
There are many instances in cc's where members take regular monthly drawings which are debited to their loan account, and their "salary" or dividends are determined by the accounting officer at the end of the year, to minimize the tax liability without doing anything dodgy. Often they were hamstrung by the need to avoid debit loan accounts. That pressing need is much reduced by the new rules even though the new rules were basically drawn up to eliminate the cumbersome STC and STC credits administration that arose from deemed dividends arising from debit loan accounts.
Realise also that debit loans to owners looks lousy in the balance sheet and worse, if the repayment arrangements are dodgy, the auditors or accounting officers would almost certainly apply an impairment adjustment, which is not tax deductable, but which does reduce profit and retained income, further impairing the balance sheet.
If the entity has incurred general finance charges, like overdraft interest, you might well have to add back some or all of it as non-productive interest.
There are other technical consequences outside the scope of the discussion, too.
I can't possibly imagine that the cash flow benefit of something so elaborate justifies the strife that comes with it.
Interest would depend on the loan agreement, or if there is none, then the agreement between the members as to whether the loan attracts interest.
Credit loan balances (money loaned to the CC) don't have to have interest charged, unless it is part of the loan agreement.
Debit member loan balances (money loaned by the CC) can become particularly complicated when you consider SARS's view on debit member loan balances. Generally, you will want to charge interest on a member's debit loan balance, if there is still an amount payable to the CC at the end of a financial year. The reason for this is two-fold:
1) SARS may deem the interest that would have been charged on the loan (at the SARS recommended rate) to be a fringe benefit taxable in the member's hands.
2) SARS may deem the loan to actually be a dividend, and demand dividends tax (from 1 April 2012) be paid on the debit loan.
Simplest solution, in most cases, is just to ensure a loan to a member is conducted at arms length, in that interest is charged thereon at the SARS recommended interest rate (currently 6.5%).
Regarding your query about the debits and credits - yes, you'll treat all money in and money out between a member and a CC as part of one account (his member loan account). There's no need to show debits and credits in separate accounts in this case.
Hi David,
I realise that this thread is a bit old, but I was wondering if anything has changed in the interim regarding SARS attitude towards the interest rate on CREDIT loan accounts (i.e. CC owes the member/s money)? - is it still the case that credit loan balances don't have to have interest charged (assuming that this is not part of the loan agreement)? I understand that this obviously increases the CCs tax exposure, but of course reduces the interest earned by the members in their personal capacity so I was wondering SARS ever challenged this (particularly in cases where the interest rate is reduced in a particular tax year)?
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