Determining owners salary

[league_of_ordinary_men]

Hi Dave.

It's not an expense.

The drawing of money out of the business goes straight to the Balance Sheet as an Asset (Meaning the owner took out a loan). So typically you find balance sheet item called, "Loan to Mr. K. Koo R100 000 Debit".

As far as SARS is concerned, you can not use drawings to reduce tax, because the owner loans don't reduce profits as they never make it to the income statement.

What you can do, is try use the "refund" route. How it works is, you buy stock for your company and you issue an invoice to the business to pay you back for your petrol, your stock, and other expenses. The invoice with all other supporting documents does reduce tax and constitutes an expense. Also keep all slips of restaurants and meals, you can write them off as expenses saying you were in a client meeting.

So I think there is definitely something wrong with the logic of drawing out profits in a registered company. You can play that game in partnerships and sole props.

Miro you mind if I ask you when I have a question you sound like you know what your doing.

[Miro Bagrov]

Salaries bear the PAYE tax.

Profits bear companies tax and VAT.

Buying capital equipment on the business name is a depreciateable expense. Business property expenses are deductible.


Ideally you would find a way of paying the least amount of tax in combination of these three. I can't say more without numbers or working closely but the idea is earn more, pay less tax..

[Dave A]

Gees Miro. I think we missed each other by a million miles there

When I refer to drawing money out of a private company as an expense, it would be as a directors emolument (vs a dividend). And I suspect that's what Justloadit was referring to as well.

Sole proprietorships and partnerships are, of course, a different beast completely because there the owners get taxed on the profits in their own hands, like it or not, and what you actually draw from the business has nothing to do with the tax calculation at all.

[CLIVE-TRIANGLE]

There are a few problems in this thread.

1. First, assume the shareholder and the director are one and the same person, because shareholders receive dividends, not directors.

2. Assume there is no shareholder / director loan. The director’s remuneration is simply the total drawings less dividends. If not then the difference is a loan to the director. If this is the case then you must firstly ensure that the company meets the solvency provisions in the companies act and secondly, if you do not charge interest at 8.5% presently, then the interest not charged is deemed a dividend. Note: not the loan, the interest not charged.

3. Assume there IS a shareholder / director loan to the company. You can split the total drawings between repayment of the loan, salary and dividend. You select the amount of the three components that makes the most tax sense.

4. If it is important in your particular company, you might also need to consider the effect on your balance sheet.

An interesting related issue that concerns new companies, or companies that have adopted an MOI under the 2008 Act, is that dividends paid are subject only to the solvency tests, and not capital preservation provisions, which are that assets must exceed liabilities and any payments to shareholders / directors (inlcuding loans) must not render the company incapable of meeting it’s normal trade obligations. This means you can even pay dividends out of capital.

5. The challenge in (3) above is predicting the outcome so that during the year the correct PAYE can be paid on the director’s remuneration.

[Justloadit]

3. Assume there IS a shareholder / director loan to the company. You can split the total drawings between repayment of the loan, salary and dividend. You select the amount of the three components that makes the most tax sense.

5. The challenge in (3) above is predicting the outcome so that during the year the correct PAYE can be paid on the director’s remuneration.

This is the reason that I mentioned to have a fixed monthly salary, in which the PAYEE is predictable, and the provisional tax bi yearly payment is to correct the figure for the other drawings taken during the provisional tax periods. I am not sure on this one, as I have not been taking extra during the last few years due to financial pressures, but there used to be a third provisional corrective payment in the following year, usually August, in which you could adjust the tax payment if you short paid for the year in question, if there was a greater profit than the drawings you took, to adjust the tax and avoid a penalty for under declaring income.

[CTS]

I started my private company a few years ago with a directors loan to the company and 100% shares.
I pay myself a small salary just to cover home loan and a few other expenses, and my wife more so she can pay her car and keep the family going.
The business is growing steadily over time and has no overdraft or bank loan, only director loan outstanding.

the question is..
I want to buy a new car but are paying myself to little to get a loan, what would be the best options to go about it?

If i pay myself a bigger salary, I'm scared that I take to much operational cash that the business might need.

I was thinking of paying myself more so that I have a better payslip to show creditors, and then loan money back to the business if it needs it.
Will this work, or are there other ways to do it.

I was considering buying a company car trough the business, but the bank said my business to young (5 Years)

Any advise please

[Dave A]

If i pay myself a bigger salary, I'm scared that I take to much operational cash that the business might need.

I was thinking of paying myself more so that I have a better payslip to show creditors, and then loan money back to the business if it needs it.

It's that little combination that troubles me, and is probably why you are having problems getting finance. No amount of playing with book entries is going to change the cash generation ability of your business* - and it is the cash generation ability that determines affordability.

My suggestion would be: If you base your car purchasing decisions on excess cash flow over a sustained period, you will get ahead of the game. If you base your car purchasing decisions on what you want rather than what you can confidently afford... well, that's why there are so many people with lousy credit records.

*There are exceptions, such as tax efficiency measures to keep what you pay in tax to a minimum, but these you should be doing anyway.

[dellatjie]

I am not sure if this is acceptable any more, but in the past auditors used to issue a letter, stating the monthly drawings of the client, and based on that, finance was evaluated?

[Marius1975]

Hi, I've got a question, my brother and I started a cc about 3 years ago, our turnover pm is about R300k with a net profit of about 110k pm - We pay ourselves R30k each pm with pension and medical, car, food and petrol benefits. We have saved up about R900k in the business savings account and the banks loves us and keep on offering us loans for things we don't want. I think the TAX on our salaries are all ready between 28-30%

Back to my question, we want to start taking more money home and want to pay as little TAX as possible. What would the best way be of doing that? I've read about dividends but don't really understand it. Lets say we want to earn R40k each per month, what would the best way be to get that our of the business?

[Justloadit]

Nice business you have there.

In my opinion, dividends in a CC create more hassle than benefits, as the CC pays tax on profits, and then what is left is distributed as a dividend. On receipt of the dividend, if I am not mistaken is tax free, as the tax was already paid by the company.

Once you in the arena of good income, there is very little one can do to reduce the tax bill, as the income places you into a higher tax bracket. The most cost effective may be to take it out as a salary.

Some of our other forum members may have better better advice.