Substantial debit member's loan account

[trevorp]

I was reading SSS100 suggesting and thinking; surely it can't be that simple :-) Surely writing a loan off has it's own set of requirements and consequences but like he said the husband sees it as his way of getting something back from the business for all his efforts he just fails to realise the consequences.

I was thinking to “pay” the husband a salary to start reducing the debit loan account, accounting for it as follows:

Dr - Salaries
Cr - Members Loan Account: Home Loan
Cr - Members Loan Account: Vehicle Instalments

I should just tell the husband he must not make an actual payment from the business bank account to himself because he already “earned” the salary.

Clive as you said, I’ll have to crunch the numbers and determine the most tax effective mix of solutions and as SSS100 said, the husband doesn’t want to pay tax but the husband will have to realise there is no way to escape tax and trying to do so can be disastrous.

I’m not familiar with the solution to prepare a loan agreement. How exactly would that work? Obviously the agreement would need to be in writing stating the required interest rate, term of the loan and repayments required, signed by the husband and the CC represented by the wife who is the only member but how does the accounting work?

For example,
The CC pays the first vehicle instalment of R8,000 on 01/03/2012. The vehicle is registered in the name of the husband and the instalment sales agreement is in the name of the husband. Assume the there is no opening balance. Accounting for it as follows:
Dr – Members Loan Account: Vehicle Instalments – R8,000
Cr – Business Bank Account – R8,000

Now I need to calculate the interest for the period of March 2012 on the loan. I calculate it as R8,000 x 6% / 365 x 31 = R40.77

Accounting for the interest as follows:
Dr – Member Loan Account: Vehicle Instalments – R40.77
Cr – Interest Received: Member Loan Account – R40.77

The following month (01/04/2012) the second instalment is paid by the CC.
I calculate interest for the period of April 2012 as R8,000 (first instalment) + R40.77 (interest March 2012) + R8,000 (second instalment) = R16,040.77 x 6% / 365 * 30 = R79.11

Is this correct? What happens even though there is an agreement, the husband doesn’t make any repayments? The debit loan account keeps increasing and the interest received keeps increasing. Surely this can not continue indefinitely and the debit loan account hasn’t been eliminated.

Am I missing something?

[SSS100]

My post, as much as it maybe inappropriate, is purely based on the practicality out there
Lot of people feel they are paying too much to the government and not getting any incentive for starting he business and of course creating jobs in this country as it currently stands
In that way, such people in that situation will rather not entertain the consequences sinario
And expect you the accountant/ bookkeeper to be more "creative" in dealing with such matters

I think the last solution posted will work, only if the husband will agree and understand that he will not be able to withdraw he salary, it's only created to deal with the loan account, to offset it

But, will he agree to that? I doubt it

[trevorp]

SSS100 what you say is true. Lots of people feel they are paying too much to the government and not getting any incentive for starting the business and creating jobs.

That's going to be the difficult part, getting the husband to agree to it. But he can either accept it or reject it and suffer the consequences when SARS does an audit.

[Dave A]

SSS100 what you say is true. Lots of people feel they are paying too much to the government and not getting any incentive for starting the business and creating jobs.

Given what my enterprise generates for SARS, the only way I stay sane is with the following outlook:
VAT - it never was your money in the first place.
PAYE - it's the employees' money.
Other payroll taxes - small potatoes compared to VAT and PAYE.
Income tax - at least it's only on profits (theoretically "money made", although in practice it doesn't work out that way, of course).

Yeah, I know - it's rationalising the issue and there are flaws in the logic. But it doesn't hurt nearly as much paying it over if you don't covet it

When I get the chance, I try to focus on "how do I make gov do a better job spending it" - at least when I've got enough time left in the day after thinking about how to make the damn money in the first place.

[SSS100]

The gov already have a good way to spend it Dave, it's called Nkandla upgrade
Sounds familiar?

[Chrisjan B]

That's not spend - its waste...

[SSS100]

And me and u as tax payer have no control over, therefore no recourse as well
Hence the husband point of view in this post

[CLIVE-TRIANGLE]

The 7th Schedule to the Income Tax Act covers this aspect (writing off of a loan) pretty well. As matters stand it would regarded as taxable income in the hands of the wife, hence my "if only it were that simple" comment.

[Blurock]

SSS100, if only it were that simple!

Trevor, the reason I asked about the accounting officer is because in my experience one sometimes meets much resistance and you are then forced to accede to the client's wishes, let the predicted consequences come to pass, try not to gloat when they do, pick up the pieces and repair what you can. The alternative often is to lose the assignment.

You clearly know what you are doing, so I'd say trust you instincts.

SARS are getting more clued up (to collect tax) by the day. I think it is grossly unfair of the client to expect of the accountant to risk his reputation and possibly his career to cook the books to avoid paying tax.

There are legal ways of structuring remuneration and reduce tax liability. Use it.

We all have to pay tax. We can not expect some citizens to pay and others not. If all accountants stick to their ethical and moral principles, they can start making a difference in curbing corruption. No use shouting about the chief criminal in charge who is stealing the country into bankruptcy. Change starts with you and me.

[Justloadit]

I am not advocating tax evasion or corruption in any way, but when the chief criminal steals millions, the few rands that the laymen is attempting to evade may seem to be insignificant when the values are compared.