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Debit loans and deemed dividends – practical considerations · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for Tax Break.
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  This is a podcast about South African tax for South African
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  tax professionals and practitioners.
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  My name is Peter. Finish 1.
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  And in each episode I share my thoughts with you on a topic or
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  recent development in South African tax.
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  And I try to keep the episode short enough that you can listen
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  to them whenever you've got the quick gap in your calendar.
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  Now, today we're talking about dividend stacks on debit loans
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  in companies. So those of you who have been
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  listening to the podcast for a while would remember that
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  earlier I had an episode about various considerations that you
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  have to take into account when companies lend money to their
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  shareholders. Today's focus is slightly
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  different and it's more on the practicalities that when a
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  company has now made a loan to a shareholder, the loan arises
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  from the fact that the person is a shareholder and it doesn't pay
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  interest. What do you need to take into
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  account from a practical perspective?
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  Now, I think the first practical aspect that you need to consider
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  is the right that's involved here.
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  So if a, if there's a loan to a shareholder and that loan does
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  not pay interest or base interest at least and the
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  official right, then a deemed dividend arises.
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  And this deemed dividend that arises is the difference between
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  the interest that we have accrued on the loan had it been
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  added bone interest at the official rate and the interest
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  that was actually charged in the case of an interest free loan,
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  probably zero. So the difference between those
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  two things that's your deemed dividend.
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  Now as you can then see the the concept of the official right is
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  is central to all of this. Now the official rate is a term
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  that's defined in the Income Tax Act.
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  In the case of a Rand denominated date, as a lot of
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  these shareholder loans would be, it's the repurchase rate
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  plus 100 basis points. So basically the repo rate plus
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  1%. Now as you know, the the repo
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  rate changes from time to time. There was a change not so long
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  ago. And when a new rate is announced
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  by the Reserve Bank, that new rate becomes the official rate
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  from the month after the month in which it was announced.
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  So in other words, if there was a right change announced in May,
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  then for June, the new rate is the official rate for for tax
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  purposes. The second practical aspect that
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  I would like to remind you about is the win.
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  So we've spoken about the rate, how to do the calculation, the
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  timing and when this happens. So what the legislation
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  determines is that this deemed dividend is deemed to be paid by
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  the company on the last day of the year of assessment.
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  So for a lot of the smaller companies, especially the ones
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  where the shoulders draw amounts throughout the year and that's
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  how the the David loan accrues. If you've got a February year in
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  which a lot of them is then there the dividend is deemed to
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  be paid on the 28th of February. And this means that you have to
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  submit your dividends tax return and pay the tax by the end of
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  March. Now this is the exact reason why
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  I've actually decided to do I have this episode at at this
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  point in time, I threw in a few discussions with some
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  accountants. I've realised that taxpayers and
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  their accountants from time to time actually forget about this,
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  this tax. So unlike something that
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  provisional tax or the normal tax season or empty 501 filings,
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  this, this, this isn't just isn't as as obviously part of
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  the normal tax cycle as as those things.
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  So taxpayers and the accountants tend to forget about it.
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  So just make a note if if your firm doesn't have a a process
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  for this, maybe implement some something for this to to at the
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  end of every year of assessment, check whether they said a David
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  Lane or not. The next thing is the nature of
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  the the deemed dividend and to actually base the cost.
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  So the dividend is deemed to be a dividend in species.
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  So what that means is that it's not the shareholder doom the
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  learner's being granted, but the company that's responsible or
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  liable for the tax. And if the company is liable for
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  the tax, it means that all the shareholders in that company
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  essentially be a part of the cost of this tax.
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  So I have on a few occasions seen that when the other
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  shareholders in a company realised that one person has
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  been making drawings, these attacks on these on these
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  drawings, and they all be the cost of this tax.
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  They are. Yeah, not not too happy about it
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  most of the time. So just something to be in mind.
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  It's not something not not a cost that you can just directly
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  pass on to that shoulder. The last thing I would like to
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  point out, and it came out in one of my recent consultations,
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  although I think it's a very rare, it should be coming
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  becoming more rarer and rarer is that if you've got an alt learn.
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  So in other words, alone that throws before dividends tax came
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  into effect and that loan was subject to SDC, The the loan
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  isn't subject to the deemed dividends tax rules under the
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  dividends tax system. So what that practically then
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  means is that you need to separate the, that loan into its
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  spots. The portion that arose before
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  different stacks became in or came into effect and the portion
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  that arose afterwards. And there would be some
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  practical questions there as to if there's been a repayment,
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  where do you allocate it? Do you allocate it to the oldest
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  date first? So in other words, the the
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  portion that was subject to SDC or do you allocate it to to the
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  newer bot? So some practical questions to,
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  to, to think about, right. So do summarise and conclude for
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  today's episode. A few practical things we spoke
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  about that you need to keep in mind, the rate, the date when
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  this tax needs to be paid, who practically based the cost of
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  the tax and that you may have to in some cases split the loans
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  into an old portion, a pre dividends tax portion and a post
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  dividends tax portion. That's it for today's episode.
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  If you've got any comments, feedback, ideas for future
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  episodes, please send me an e-mail.
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  My e-mail address is in the show notes.
• 7:25
  If you like the podcast, go and subscribe on your favourite
• 7:29
  podcast platform. And of course, please tell all
• 7:32
  your friends about it. It's always nice to every week
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  as it goes on, see that there's a bit of a growth in the in the
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  followers and the subscribers. And then lastly, as always,
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  nothing in this podcast was intended to be tax advice or a
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  substitute for fact specific tax advice.
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  Until next time, goodbye.