If you are an owner-manager in a company or close corporation, you should be aware that certain actions may result in a tax cost that you did not anticipate!
Most people believe that secondary tax on companies (STC), levied at 12,5 percent, only arises if you declare a dividend or distribution from your company or close corporation (CC).
I don't intend to deal with all the exemptions or mechanisms of STC credits. I simply intend to raise awareness of the situations that may result in an STC liability without there having been a formal declaration of a dividend or distribution from the company or CC.
These unexpected liabilities generally arise because of "distributions" that the tax legislation deems to be subject to STC.
The most common example of such a "distribution" is the provision of an interest-free or low interest loan to a shareholder or member. Unless interest is charged at the official rate (currently 16 percent), or the company or CC has no reserves available for distribution, the loan will be deemed to be a dividend subject to STC.
The STC should be paid by the end of the month following the month in which the loan was made.
It is very easy to fall into this trap if as the owner-manager you allow your company or CC to pay your personal expenses on the basis that you will owe the amount to the company. Generally, you intend to see what profits the business will make, and to set the loan off against a bonus you pay yourself at the end of the year. Unfortunately, this could be expensive because you will be liable for STC on the amount of the loan, and you will also be liable for income tax if you later set the amount off against a bonus.
There is a small concession - in terms of the law if a loan has been deemed to be a dividend, and it is thereafter repaid, the amount repaid may be treated as a dividend credit and set off against the next dividend declared.
To avoid paying STC, make sure your company or CC charges interest on loans it makes to you or, if it pays amounts on your behalf, that these amounts are treated as a salary.
It is also important to know that STC applies if the loan is made to one of your relatives (as defined) or to a trust of which you or your relatives (as defined) are a beneficiary.
And the loan need not be cash - the law regarding STC includes any amount used or applied by the company for the benefit of you, your relatives or your trust!