Salary vs Dividend vs Loan Accounts and the Tax implications
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- Опубликовано: 29 май 2022
- If you are a business owner from a regulatory perspective you have 3 possible options to pay yourself an income; a salary, a dividend or draw down on your shareholders’ loan account. In this video I will compare these three options and explain the different tax implications for each option. So, if you are a business owner or just inquisitive like I am, then this video is for you.
Just to be clear I am not offering any financial advice I am simply clarifying and explaining some basic business concepts for you to consider especially when engaging with your accountants so that you have a much better understanding of these concepts. I am aware that countries across the world have different tax rates and acronyms for their taxes, but in general many of the concepts remain universal. So let’s get into it.
As we all know, a company is a legal person while you and I are natural persons, which means that a company has the same rights and responsibilities as we do; for example it can own property, hire and fire people, sue and be sued as well as pay taxes just like we do. It is important for you to have a clear understanding of this concept as money often flows between you and your company and when it does, it can either be classified in 3 different ways, that is as a salary, a dividend or a shareholders loan and each of these option have different tax rates and implications.
Let’s start off with the shareholders loan account as many of our clients are unfamiliar with this concept. When you started your company it was effectively just a piece of paper and had no money. So to get your company up and running you would have had to use your own money to get things going. In fact, every cent of your personal money that you have put into the business can be claimed back from the company with interest. This money is called the directors or shareholders loan account and it is “tax free”.
Many entrepreneurs go as far as selling their own mobile phone and desktop PC’s to their company to create an even larger loan account. A large loan account is particularly useful as it gives you options to reduce both personal and company tax.
I said earlier loan accounts are tax free but they are not interest free, which means that interest must be charged on the loan. This is a double edge sword as on the one hand the interest is an expense in the company which is a good thing as it brings down the company tax liability, but at the same time the interest is seen as income in your personal capacity and therefore effectively increases your salary which could push you into a higher personal tax bracket. SARS publishes the interest rates that should be charged on loan accounts as can be seen here in Table 3. These rates are actually the bank repo rate plus 1%. Therefore, each time the repo rate changes the table adjusts. It is good to note that SARS does offer an interest exemption of R 22800 per year.
Beware that if you don’t charge interest on the loan, it is deemed to be a dividend and is taxed at a rate of 20% in South Africa.
The next option is a salary. As we all know, a salary is defined as a fixed regular income usually paid monthly. If your business can afford it there are definitely some benefits in paying yourself a regular salary. The first being that the salary is an expense for the company which means the profits in the company will be reduced by the amount equivalent to your salary bill. This will in turn result in the company paying less tax. Remember company tax is only paid on net profit after all the expenses have first been deducted.
But on the flip side you now will be liable for personal tax or PAYE as it is called here, as you are receiving a regular salary.
To choose the most tax efficient salary, you need to study this graph. Let’s take a look - Company tax is a fixed percentage of profit regardless of the amount of earnings. It is currently 28% and is depicted here by the horizontal blue line, with the x-axis representing money and y-axis the percentage tax you are liable for. The personal tax or PAYE tax is the logarithmic curved graph line starting from no tax for individuals earning less than R7,275pm and peaking at 45% tax for individual earning above R138,050pm after which it flattens out. Now assuming your business can afford it the optimal salary level in terms of tax efficiency is at the point where these two lines cross. For the 2022 tax year this amount is R60kpm. Any salary above this level depicted by the red line will attract more than 28% in PAYE therefore it would be wise to consider leaving the profits in the company and drawing more income from your shareholders loan account as it is tax free, except for the interest portion discussed earlier. 
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Thanks for this greatly helpful content. Suppose a company owes a director's fee monthly to the owner, but retains this fee as a loan granted by the owner. At the end of the year the loan is repaid with interest at SARS's specified rate. What are the tax implications? Is the owner only liable for personal income tax on the interest received?
Hi there, This is an excellent question and to be honest I am not sure myself. I doubt SARS will lose out on their share of tax, but my advice would be to clear this up with your accountant. Please let us know if you find the answer.
What happens to a sole members interest if he or she converts a CC to (PTY) prior to 2011, interest in the new pty?
Hi Alan, prior to 2011 you are referring to the old companies Act, the concept is similar to the new Companies Act. The members automatically become the directors and shareholders of the company. You can add additional directors simultaneously but not remove any. This can happen after the conversion is complete. I hope this answers your question.
Hi, i have just started my own company and registration done with CIPC - it is a sports massage business. I am the only director and no employees. I also dont have a lot of expenses. What would be the best way to pay myself. R30k per month sounds in line at the moment. My thoughts...if I pay a salary, it will be an expense and bring down the company taxes. But then I will also have to pay PAYE, UIF and SDL. And would the admin not be too much work for just one person? On the other hand, i dont have a loan account, there was no startup money needed, so nothing paid into the company, So there is no loan for me to take money from. If i have cash in the bank, can i withdraw from the company, book to loan account? But this means the loan account will just increase, how will it be offset eventually? And if I draw cash, i will then declare that on my personal taxes as "other income", right? Thanks
Hi Liandra, these are all very good questions. The intention of the video was to bring awareness of the various options available to you, so that you can ask informed question to your account who will help you find the most tax efficient solution for your individual circumstances. I am sure with your inquisitive mind you will find right solution. I wish you good luck.
Do you guys do consulting work? Specifically related to property and structurinh
Hi there, no we don't, however based on your question. I have made two videos on this topic which I hope will assist you ruclips.net/video/n-_74PTFLnw/видео.htmlsi=50tx0FK6L9hy3OXq and ruclips.net/video/PAoQOwyenuE/видео.htmlsi=rBfl8ZYPbE76EFjO
What I learnt the hard way, was that if your company is going south, or most likely going to….don’t take a salary, draw down on your loan account as there is no PAYE tax liability……..these is a company tax liability, but when you liquidate, SARS will most likely write up this off….unless, they can prove that you were a negligent/fraudulent director….
I would agree, but the situation could be more complex especially if there is surety involved
What about a loan from the company to me. No intention of repaying the/my company ever. Surely the interest charged is way less than the tax rate and then I wouldn't have to pay the interest anyways as it get's added onto the loan. Like the billionaires do it in USA with the banks?
Hi Andrew, your question is complex. Loaning money from your own company ends up being a nil sum game as you are borrowing from Peter to pay Paul. Everyone would be doing if it were viable.
Regarding the debt, you can following Robert Kiyosaki example as long as the debt is covered by an income generating asset (such as rental) and you remain in positive cashflow. This is very difficult to achieve in South Africa especially with such high interest rates. So if you borrow money to by a sports car, this would be a very bad idea as the car is not an income generating asset.
There's no requirement to charge interest on credit loan accounts. It should not be confused with debit loan accounts, or loan structures subject to sec 7C where a trust is involved. Sec 7C only applies to individuals' loans receivable from 'trust' or 'company held by trust'.
That is correct, 7C has been a huge headache.
Is the company tax rate not 27%? If so, how does the graph change?
Hi Aye, currently it is still 28% but this will change to 27% for companies ending their financial year on or after 31 March 2023. The concept will still remain the same as the percentage is a flat rate and the 1% reduction will only make a marginal difference.
Do these 3 options also apply if you register for turnover tax (less than 1mill) and for SBC companies?
HiTiaan, great question. Yes for SBC but not for Turnover tax.I have made a video on ruclips.net/video/o4H5w4tQyXs/видео.htmlsi=_DtgQN7r-jvhB-FR Tax incentives which to a certain extent covers your question.
@@swiftreg Ah I see, thank you so much for linking to that video, was of great value to me 🙏
So are you guys accountants as well? i need a new accountant for my business as i feel the lady i got now is not very clued up with real estate agencies
Hi Coenie, no we are not accountants. I would recommend you talk to our accountants; the MST Group who are based in Brackenfell (Cape Town). You can speak to Jacques or any of the partners.
please advise on owners draw
Hi there, the size of the loan account is equal to the amount of money you invested into the business, so once you have depleted the draw down there is no more loan account.
What if you don't have a loan account to draw down on? Then the R60k salary needs to be much much higher as you need to pay 28% company tax followed by 20% dividend withholding tax before paying out the dividend to yourself.
Hi Mark, you are correct, but what I am trying to illustrate is the relationship between salaries, loan accounts and dividends and how they can be used to achieve greater tax efficiency. In the scenario you describe one could also keep the funds in the company and buy assets in the name of the company. SARS has a few other incentives such as turnover tax for small business which could be very useful if that applies to you.
@@swiftreg thank you. Turnover tax doesn’t apply to our business unfortunately. We have very options to optimise or tax position.
How important is the sic code linked to the pty which is an FSP?
If I decide to close down my company, would I need to pay tax when transfering the company's already taxed assets to myself?
Hi there, if the company is closed down the assets (property) will need to be sold and this event will trigger Capital Gains Tax (20%) The income for the sale of the assets will go back to the company which in turn will have to distribute the proceeds as per the video.
I have a cfd trading company, the company has no employees. I was thinking of just charging all the profits i make for the company as a contractor. I would trade for the company and then charge 30% for every transaction. Is this a viable strategy instead of the standard salary or dividend?
Hi Hangwelani SARS has such a scenario covered. If a contractor derives its income for one employer it is deemed to be an employee and subject to PAYE.
@@swiftreg So would it be better for me to not register mysef as an employee but just stay as the director and get income via dividends?
Hi Hangwelani Many directors also register themselves as employees of their own companies to optimise their income from a tax perspective. I suggest you talk to a tax practitioner to help you structure your income correctly.
Is this known as a PSP?
If the business owner is taking a loan from the company at an interest rate, wouldn’t the interest be an income to the company? Hence taxable ?
Hi there, yes you are correct, loans provided by the business to external entities generally attract interest, making the interest portion payable back to the business considered as income. As a result, this interest income is taxable for the business. On the other hand, investments in the business can take the form of equity (capital) where the investors become partial owners without any requirement for interest payments. Equity investments do not generate interest income for the business and may be subject to different tax implications, such as potential taxation of dividends or capital gains depending on the relevant tax laws.
What If I never repay my loans account and just draw forever ? 😅
Hi there, you don't repay your loan account; the company owes you the money. Remember this is the money you invested to start the business.
@@swiftreg okay I hear you, so what happens once the company has paid back the amount I invested? Can I still continue to draw?
No, your loan account would be depleted and therefore ceases to exist. You could loan money from the business but that is treated as a standard loan with interest.
How is not charging interest on the loan account seen as a dividend? A dividend is from after tax profits. Reducing your shareholder loan is not an income or dividend, just reducing your loan by taking back your after tax money
The loan is from the company to you, the natural person. Because the company does not charge interest on that loan(to you- the shareholder) it is then a deemed dividend. Also it isn’t actual dividend it is just a dividend for tax purposes, so you will pay tax at the dividends’ tax rate on the interest that would have been charged
Thank you for clarifying that.
Interest on shareholder loan account is not free. Be clear. Only the principla of the loan is untaxed.
Yes you are correct the equity loan is interest free.
Wow, super helpful! Thank you! Even I was able to follow along and I feel so much better equipped to tackle my business's financial side!
Glad it was helpful!