[Question] Personal tax liability for startup funds repaid by company to me

[HealthyDozen]

Hi - I request your advice on a personal tax matter to do with a loan account for funding a startup company:

This is the opposite of the common loan account scenario where a company lends money to a shareholder.

I started a new one-person company so I'm the sole director. I also have a regular salary-paying job.
I loaned say, R100 000 to NewCo to get it started. This was from after-tax money earned from my regular job.

In South African tax year 2018:
- NewCo earned IT services-based income from clients.
- NewCo pays me R120 000. I consider this to be a R100 000 loan repayment and R20 000 salary from NewCo, and the startup loan has been repaid to me.

The person doing my *personal* tax return says my income from NewCo must be declared on my *personal* tax return as R120 000 not R20 000, and that the loan repayment will be taxed as income.
I disagree - I think my income is only R20 000 to be declared as income, plus of course whatever the IRP5 from my regular job lists (no issue with the regular job income declaration).

QUESTION: There's no interest charged on the R100 000 loan so should it be taxable income when it's repaid?
This would be daft as I would never have loaned NewCo the money if it was going to be taxed a second time when repaid to me.

Your accounting and tax advice would be greatly appreciated!

Thanks folks

[Andromeda]

The person doing my *personal* tax return says my income from NewCo must be declared on my *personal* tax return as R120 000 not R20 000, and that the loan repayment will be taxed as income.
I disagree - I think my income is only R20 000 to be declared as income, plus of course whatever the IRP5 from my regular job lists (no issue with the regular job income declaration).

The person is touched. You pay tax on income. A loan repayment is not income. It really is that simple.

QUESTION: There's no interest charged on the R100 000 loan so should it be taxable income when it's repaid?
This would be daft as I would never have loaned NewCo the money if it was going to be taxed a second time when repaid to me.

As already analysed, only the R20,000 is income. Why not regard and specify it as interest? The first R23,800 is exempt, so unless you have other interest ...... The 1st rand in salary will simply be added to your other salary which is bound to bump your tax up needlessly.

[HealthyDozen]

Thanks for the effort to reply - your help is sincerely appreciated.
And the advice on the interest is an extra bonus.

Do you perhaps know where I can read up on the R23,800 interest exemption in SARS or other docs? Learn something every day...

[Andromeda]

Sure, you can get it here

[Dave A]

I think the one thing to bear in mind is the loan repayment would come from "after income tax" profits taxed in the hands of the company.

[HealthyDozen]

OK, so apparently my accountant and I were saying the same thing that the loan repayment to me is not personal income. Progress.

Dave, to me it seems reasonable that repayment of the loan by NewCo would be an expense to NewCo, and if there's any profit left after that then the profit would be taxed. If I understand you correctly are you saying this is not the case?

And the last point on the permissible tax exempt interest (as per Treasury/SARS doc from Andromeda): My accountant says that declaring R23,800 interest would be excessive in relation to the loan repayment and SARS would not be happy with this. Correct in that it would be a very high interest I would have charged on my personal loan to NewCo, but are there restrictions on the interest that I may charge? The interest would be still be lower than a Cash Crusaders charges to people pawning their goods (12.5% per month) or worse a micro-lender. And then since my loan was made to NewCo in multiple payments it would take some Excel what-ifs to determine the interest rate such that the interest for multiple loans accumulated to R23,800 over the FY.

Thanks for your help folks. I'm new to this forum and it has been of great help in a short space of time. Excellent.

[Andromeda]

The loan repayment by NewCo is not an expense, it is a reduction of a liability. (Also, whether a receipt is income or not in your hands is not dependent on the treatment of the payment in the other party's hands. Normally that holds true, but it is often not the case.)

The maximum interest rate approved by the NCA for unsecured credit is 26%. So I estimated on a loan of R100,000 with only a single advance and again a single repayment and a duration of 1 year, the interest would be R26,000.
On the other hand, short-term transactions are limited to a maximum of 5% per month on the first loan and 3% per month on subsequent loans within a calendar year!

I don't think the rate presents any problem, however the point I tried to make was that perhaps you should minimise the tax liability.