Most efficient way to deal with cc loan TO member

[J7J]

Hi,

What is the most efficient way to deal with a loan from a cc TO a member? (For Accounting and Tax Purposes)

The member was in a position where the cc owed him money as at the previous financial year end. He then drew a monthly amount from the cc against this loan account. For this financial year end, the member now owes the cc...

Any suggestions? Thank you.

[Dave A]

The most efficient way probably depends on the exact numbers, but one option would be to convert the excess "loan payments" to a salary or dividend draw.

[J7J]

The most efficient way probably depends on the exact numbers, but one option would be to convert the excess "loan payments" to a salary or dividend draw.

Thanks, Dave. The amount at stake is not huge. And the loan only went from a credit to a debit loan 4 months before year-end.

If this loan is treated as a fringe benefit by charging interest at 6.5% p.a. on the outstanding balance for the 4 months and the member is taxed on this fringe benefit through payroll taxes (will back-pay PAYE plus the penalty and interest) - is this the correct treatment and is there anything else that should be considered?

[CLIVE-TRIANGLE]

Like Dave says, put through salary.

Leaving it as a debit, despite your suggestion, you invite SARS to compel you to declare a dividend, or disallow any interest expense incurred by the cc.

By the way, the loan cannot be a fringe benefit, only the absence of interest thereon (or too low). It becomes a mess, because fringe benefits also attract VAT.

Dave's way is best and is what is usually done.

[J7J]

I think it might put the situation into perspective if I use the "close to" actual numbers:

The loan value at the end of the financial year is R55,000 (Feb'12). This balance has grown from a credit balance in Oct'11 into a debit balance of R1,000 (Nov'11); R1,500 (Dec'11) and R25,000 (Jan'12).

When I calculate the fringe benefit of the no-interest loan, it works out to R615 worst case scenario (with worst case scenario I mean that I take the month end balance as the balance to calculate the month's interest as follows:
Feb'12 R55,000x6.5%x1/12= R297.92 PLUS
Jan'12 R25,000x6.5%x2/12= R270.83 PLUS
Dec'11 R1,500x6.5%x3/12= R24.38 PLUS
Nov'11 R1,000x6.5%x4/12= R21.67


The PAYE on this amount payable by the member would be very little (let's say @40% it would be R246). The fringe benefit also gives rise to R75.50 output VAT.

Now, if we put this R55,000 down as a salary, it would mean PAYE of R22,000 (R55,000x40% tax rate).

The member is going to pay back this loan in the new financial year through member contributions.

What are your thoughts on the scenario after I have given you more exact figures? Have I calculated the fringe benefit and VAT correctly?

[CLIVE-TRIANGLE]

"Now, if we put this R55,000 down as a salary, it would mean PAYE of R22,000 (R55,000x40% tax rate). "
Less 28%, being the tax reduction in the cc. That's R6,600. Unless of course the cc is in a loss situation, tax wise.

If the loan is to be repaid in the next year, in full, then your solution is ok and the loan is a short term loan (current asset).

I assume the cc is solvent? Also, are there any finance charges (not instalment sales)

"The member is going to pay back this loan in the new financial year through member contributions."
I'm not too sure what you mean by this?

[J7J]

"Now, if we put this R55,000 down as a salary, it would mean PAYE of R22,000 (R55,000x40% tax rate). "
Less 28%, being the tax reduction in the cc. That's R6,600. Unless of course the cc is in a loss situation, tax wise.

Thank you for pointing this out - sometimes the detail of a complex transaction takes your eyes off the overall picture.

I assume the cc is solvent? Also, are there any finance charges (not instalment sales)

Insignificant amount of interest paid to overdraft.

"The member is going to pay back this loan in the new financial year through member contributions."
I'm not too sure what you mean by this?

What I meant here is that he will not be drawing funds from the cc, rather contributing back into cc.

Would it be ok to leave a small amount as a debit on the loan account - around R2,500?

[CLIVE-TRIANGLE]

I doubt that would be a problem.
Sec 45(3)(b) of the Companies Act should give you guidance, despite it being a cc.
Your only other concern should be that a loan account that stays in debit implies that there is little or no prospect of repayment and in reality represents undeclared income.

[J7J]

Thank you very much for your guidance. I really appreciate it.