Converting shareholder loan account to interest bearing loan account - requirements

[J7J]

Hi all,

I have a client that has a shareholder loan account in the company of about R600,000 owing to the company by the sole shareholder.

The shareholder will not be able to afford the PAYE on this if we convert this whole amount to salaries paid.

As far as I understand, the other option is to convert this to an interest bearing loan account.

1. What are the requirements to do this?
2. What is the interest rate that needs to be charged?
3. Does he need to have paid the loan back monthly to have qualified for this?
4. Anything else we need to consider or any other options?

Kindly advise.

Thank you so much in advance.

[CLIVE-TRIANGLE]

Hi J7J

There is a deemed dividend implication where a low interest or interest-free loan or advance is made by a company to a resident natural person or trust
which is connected to the company. The amount of the deemed dividend is the difference between the official interest rate and the rate charged by the company on the loan.

The Act defines the official interest rate as prime + 1

A loan should have a repayment element.

[Taxforum]

If the loan was made before 1 April 2012, the deemed dividend could be the full R600 000, unless interest was charged for prior periods. The above answer is correct for loans advance 1 April 2012 and there after

[J7J]

Thank you very much for the helpful info. Really appreciate it.