INTEREST FREE LOANS WITH COMPANIES

A4bThe latest annual nation budget presented in Parliament proposed the dividends tax rate to be increased with almost immediate effect from 15% to 20%. The increased rate brings into renewed focus what anti-avoidance measures exist in the Income Tax Act[1] that seeks to ensure that the dividends tax is not avoided.

Most commonly, the dividends tax is levied on dividends paid by a company to individuals or trusts that are shareholders of that company. To the extent that the shareholder is a South African tax resident company, no dividends tax is levied on payments to such shareholders.[2] In other words, non-corporate shareholders (such as trusts or individuals) may want to structure their affairs in such a manner so as to avoid the dividends tax being levied, yet still have access to the cash and profit reserves contained in the company for their own use.

Getting access to these funds by way of a dividend declaration will give rise to such dividends being taxed (now) at 20%. An alternative scenario would be for the shareholder to rather borrow the cash from the company on interest free loan account. In this manner factually no dividend would be declared (and which would suffer dividends tax), no interest accrues to the company on the loan account created (and which would have been taxable in the company) and most importantly, the shareholder is able to access the cash of the company commercially. Moreover, since the shareholder is in a controlling position in relation to the company, it can ensure that the company will in future never call upon the loan to be repaid.

Treasury has for long been aware of the use of interest free loans to shareholders (or “connected persons”)[3] as a means first to avoid the erstwhile STC, and now the dividends tax. There exists anti-avoidance legislation; in place exactly to ensure that shareholders do not extract a company’s resources in the guise of something else (such as an interest free loan account) without incurring some tax cost as a result.

Section 64E(4) of the Income Tax Act provides that any loan provided by a company to a non-company tax resident that is:

  1. a connected person in relation to that company; or
  2. a connected person of the above person

“… will be deemed to have paid a dividend if that debt arises by virtue of any share held in that company by a person contemplated in subparagraph (i).” (own emphasis)

The amount of such a deemed dividend (that will be subject to dividends tax) is considered to be effectively equal to the amount of interest that would have been charged at prime less 2.5%, less so much of interest that has been actually charged on the loan account.

It is important to also appreciate that the interest free loan capital is not subject to tax, but which would also have amounted to a once-off tax only. By taxing the interest component not charged, the very real possibility exists for the deemed dividend to arise annually, and for as long as the loan remains in place on an interest free basis.

[1] 58 of 1962

[2] Section 64F(1)(a)

[3] Defined in section 1 of the Income Tax Act

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

FINANCIAL RISK MANAGEMENT FOR YOUR SMALL BUSINESS: DO YOU KNOW HOW TO DO IT?

A3_BIs it really necessary to be able to manage financial risk? The answer is a definite “Yes!” It can make the difference between having a successful business or being forced to close down the business. Make sure you give your business the best chance to survive and thrive by understanding and implementing financial risk management.

Financial risk management can be broken down into the following steps:

  1. Understand what financial risk is

A financial risk is any event or circumstance that can have a potentially negative impact on the finances of a business.

  1. Identify financial risks applicable to the business

Identify all the financial risks that you can think of which can have an impact on the business. Consider using brainstorming with employees and/or a SWOT analysis to help you identify as many potential risks as possible.

An example of a financial risk is that customers who buy on credit from your business will not be able to pay their outstanding accounts.

  1. Assess each financial risk separately

Estimate as well as you can with the available information how probable it is that each risk can affect the business and what the possible amounts of the damage (negative impact) could be if the risk should realise.

Taking the example of customers who will not be able to pay their outstanding accounts, the following matrix is handy to assess the probability and extent of the damage should the risk realise. Assume that the probability and potential damage of clients not being able to pay their outstanding accounts are high as indicated on the matrix with “X”.

Probability of damage occurring (clients not able to pay accounts)
High Medium Low
Estimated extent of damage Major damage e.g. R100 000 X
Medium damage e.g. R30 000
Minor damage e.g. R5 000

 

  1. Treat risks to limit negative impact on business

Select and treat those risks you have the most control over to focus your financial risk management efforts on. Control in this context will be the ability to minimise the chances and potential damage caused if the risk should realise.

Create and implement an action plan to reduce each of the selected risks to acceptable levels.

Consider using insurance to protect the business against external risks which the business does not have much control over e.g. natural disasters.

To continue with the example: the matrix shows that it is highly probable that clients won’t be able to pay their accounts, and the amount of the resulting bad debts can be major. There are measures that the business can implement to prevent, or at least decrease, the likelihood and the amount of damage due to bad debts. These are the measures that the business should focus on implementing to reduce the risk of bad debts occurring to acceptable levels. Preventive measures could include checking the credit record of customers before selling on credit to them and implementing a pre-approved credit limit per customer.

  1. Monitor the financial risk management plan

Review the financial risk management plan regularly to ensure that it stays up to date with the changing circumstances of the business and remains effective to decrease current financial risks.

Using the above example of potential bad debts, the regular inspection of the debtors’ age analysis might show an increase in long outstanding amounts which can indicate that the credit policy for clients needs to be reviewed and updated.

Proper financial risk management can greatly increase a business’ chances of being successful and profitable. If you would like to implement a financial risk management plan or suspect that the financial risk management plan currently in use might be outdated, do contact your accountant for professional assistance.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE) 

Reference list:

THE PAIA MANUAL: HAVE YOU DONE YOURS?

A2_2_BIf your business is in the private sector and has not drawn up its PAIA manual yet, now is the time to start doing so as PAIA manuals for private bodies must be submitted to the South African Human Rights Commission (SAHRC) by 31 December 2015. Do you know who will be the Information Officer (it could be you!) and what information should be included in a PAIA manual? If not, read on to be enlightened.

Which person in an organisation is responsible for the PAIA manual?

The head of a private body is responsible for compiling and submitting the body’s PAIA manual to the SAHRC. In the case of a private company the CEO is the head of the company and normally the Information Officer responsible for the PAIA manual. An Information Officer can also be the person who performs the function equivalent to that of a CEO of a juristic person. The CEO or the person who performs the function equivalent to that of a CEO can also authorise any other person as the Information Officer.

What information should be included in a PAIA manual?

The information required to be included in a PAIA manual includes, but is not limited to, the following:

  •  The name and contact details of the head of the private body:
  •  Telephone number
  •  Fax number
  •  E-mail address
  •  Postal address
  •  Street address
  • A list of other legislation applicable to the organisation e.g. the Employment Equity Act 55 of 1998, the Income Tax Act 58 of 1962, etc;
  • Lists of records generated by the business in terms of other legislation applicable to the organisation, categorised per Act, for example, list the documents required to be kept by the organisation in terms of the Companies Act 61 of 1973 under a heading titled “Companies Act Records”. Some examples of documents to be listed in terms of the Companies Act are share registers, minutes of meetings of the Board of Directors, and the Memorandum and Articles of Association;
  • Which of the generated records is available automatically without being requested;
  • Which of the generated records is only available upon request;
  • Procedures to be followed and fees payable by a person requesting information; and
  • The procedures available to a person whose request for information has been refused.

The above information is merely a guideline and should not be seen as an exhaustive list.

It is important to keep in mind that different businesses will generate different types of records according to each business’ unique trading environment and information systems. There is no generic list of records applicable to all businesses. Care should thus be taken to include all of the relevant records in the PAIA manual.

How to submit a PAIA manual

No fees are payable when submitting a PAIA manual to the SAHRC.

After completion of the PAIA manual, the head of the organisation must initial each page of the manual and sign in full on the last page.

An original signed hard copy of the PAIA manual must be posted to the SAHRC’s PAIA unit. Signed PAIA manuals may be submitted via email, but an original signed hard copy must still be posted to the PAIA unit.

A note on requests for access to information in terms of the PAIA Act

Anyone and everyone cannot just request information from an organisation in terms of PAIA. A requestor must provide, amongst others, details like their identity, a postal address/fax number in South Africa, and the right which the requestor wants to exercise/protect with an explanation of how the requested information will assist in exercising/protecting that right. A private body has the right to refuse a request for information.

The drawing up of a PAIA manual can be of benefit to a business in more ways than one. While collecting the information to be included in the manual, shortcomings in certain systems or omitted reports which are required by law, for example, can be discovered. If not for the PAIA manual, the business would not have had the opportunity to discover and correct the shortcomings or omissions.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE) 

Reference List:

Documents published by the SAHRC on www.sahrc.org.za and accessed on 23 August 2015:

  •  Example of a manual for a private body
  •  Guidance notes: PAIA manuals
  •  Generic version of Section 51 manual for private bodies