Well before the end of the tax year you need to consider whether you can do any planning to improve your tax payable for the year.
There are a number of aspects to consider. Today I will look at the question of bonus versus dividend.
If you decide that your company or CC should pay a bonus to you, it is important to have documents to show that the bonus is payable at year end. If this is not done, the SA Revenue Services (SARS) may contend that the bonus deducted in the tax return was a provision and not deductible for tax purposes.
The question of whether to pay a bonus will depend on the profits and how much salary you have already drawn from the business. The remuneration you are paid must not be excessive in relation to the services you perform. If SARS consider that it is excessive it will disallow whatever it considers to be excessive in the company or CC, but still tax it in your hands.
Also, you need to consider the different tax rates relating to you and the company/CC. The company/CC tax rate is currently 35 percent, whereas the marginal tax rate for individuals is 45 percent.
If you wish to draw money from the business in a form other than a salary, the company will need to declare a dividend.
Tax is payable on the amount of the dividend at the rate of 12,5 percent. Added to the normal tax rate, the total effective tax rate that will be paid, for profits from the company or CC to end up in your hands, will be 42,2 percent (assuming all profits are distributed).
You should perhaps take profits from the business in the form of a salary until your taxable income will be R67 476, as any extra income will be taxed at 43 percent, and you might as well draw any further income in the form of a dividend (this takes into account that a rebate of R3 215 will be deducted from normal tax payable in an individual's hands).
However, at this level of income, the tax amounts to 24,5 percent of your taxable income, which is a lower rate than your company or CC would be paying.
You can take profits from the business in the form of a salary to a point where your taxable income is R505 000, when tax will be 42,2 percent.
A further point to consider is that, if you have a loan to the company or CC, you may draw cash out of the business as repayment of the loan account.
Tax will have to be paid on profits for the year at 35 percent, but despite taking money from the business, you needn't pay more tax.
But if you borrow money from the business, and a commercial interest rate is not charged, the borrowings will be treated as a dividend, and STC will be payable.
A further cash flow aspect relates to your company or CC's year end. If the company or CC's year end co-incides with your own, ie February 28, then all profits must be taxed in this tax year which ends on February 28 1998, either in your hands or in the CC's hands.
If the company or CC's tax year ends in, say, May, you need not draw your bonus until the company/CC's year end. It will fall into your 1999 tax year and, as a provisional taxpayer, you will only pay the balance of the tax on it at provisional tax top-up time, which is September 30 1999.
Before you change your company or CC's year end, though, remember that the Registrar of Companies will need valid commercial reasons before approving the change.