How to take the tax sting out internal business loans
Dividends withholding tax of 20% is payable on the interest charged
If you are a business owner, you probably made a loan to your company when you started out to get the business going. Alternatively, you may have made a loan to your company later if your business needed some assistance with cash flow. You may now be wondering how this loan is treated from a tax perspective.
When you or any other shareholder of your company make a loan to the company, it obviously then owes you money. This is commonly known as a credit loan. From a tax perspective such a loan has no negative implications. You may make a loan to your company on an indefinite basis and it is not required that any interest is charged.
You, or any one of your other shareholders, would at some point presumably want the company to repay the loan owing to you. When your company is in a position to repay the loan, it may do so without any tax implications for the company or the shareholder; it is merely the repayment of a loan owing to the shareholder.
The flip side is a loan made by the company to you or any other shareholder. This is commonly referred to as a debit loan. With such a loan you obviously owe your company money.
These types of loans can have negative tax implications, unlike a loan you made to your company. However, there are only potential negative tax implications if the loan is made to a shareholder who holds at least 20% of the equity shares or voting rights in the company (or that person holds 20% of equity shares or voting rights in combination with a “connected person”) and the loan is made by virtue of a share held and not for business or commercial reasons.
If sufficient interest is not levied on the loan (the official interest rate is now 7.5%), the SA Revenue Service (Sars) may determine that the loan interest that should have been levied is a deemed dividend. This means that dividends withholding tax of 20% would be imposed on the interest that should have been levied. In other words, the company did not actually pay a dividend to a shareholder, but Sars deems it to have done so.
Loan of R100,000 made by company to shareholder
Interest levied — nil
Interest that should have been levied (at 7.5%) — R7,500
Dividends withholding tax (at 20% of R7,500) — R 1,500
In the example on the left the company would have been deemed to have declared a dividend on the last day of the company’s year of assessment; this can occur every year that the loan is outstanding and insufficient interest is levied. If this happens the company would have to pay dividends withholding tax. In the event that interest is charged but it is less than 7.5%, the deemed dividend will be reduced accordingly.
Note that the above provisions only apply to loans made to you as a shareholder; if a loan is made to a director of a company who is not a shareholder there is no risk of a deemed dividend being declared. In addition, there will only be a deemed dividend if the company makes the loan to an individual and not to another company.
As a business owner you should be aware of the potential negative tax implications if your company loans money to you or other shareholders as this may result in your company having to pay dividends withholding tax to Sars unexpectedly and may influence your company’s cash flow.
• Baines is a tax consultant at Mazars and author of 'How to Get a Sars Refund'