Taxman keeps keen eye on bosses

Published Jul 8, 2000

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You will probably wonder why the Receiver wants to know if you are a

director of a company or a member of a close corporation (CC). This

question is in part 14.6 of your tax return.

It also asks whether your minor child is a director/member of that

company/CC but the reasons why a minor child is included were covered in

the past two weeks or so.

This question is mainly intended for directors of private companies and

close corporations (normally also being shareholders of those

companies/members of those CCs) because they normally do not account for

the financial affairs of their companies to a broad number of shareholders

but substantially to themselves. Note that a close corporation is regarded

as a private company in tax law.

Directors of private companies and members of close corporations do not

have to pay employees tax every month, in other words they pay tax from

their salaries only twice a year (as they are automatically classified as

provisional taxpayers) whereas everybody else has tax deducted from their

monthly salaries. It is therefore partly for this reason that you have to

say whether or not you are a director/member. So, make sure that you are

registered as a provisional taxpayer before you answer ``yes`` to that

question.

The other important reason why this question is important to the Receiver

is that normally directors/ members of close corporations give themselves

generous loans from their companies/close corporations. They could also

give someone else those loans and derive an indirect benefit. If you, as a

director/member, have received a loan that has favourable terms that you

would not ordinarily have received elsewhere, there would be possible tax

consequences that could arise.

You would have to disclose such loans from your company or CC in Part 18

anyway - although you might have thought that these loans which you

received were not ``taxable``.

Firstly, the company/CC will have to pay 12,5 percent (secondary tax on

companies) of the amount loaned to you if there is no intention to repay

that loan and it bears non-market related (ie low) interest rates to you

and the loan is not remuneration.

Secondly, the fact that the loan does not bear interest, or it bears

interest which is lower than the interest rates you would normally get from

banks, will attract tax on this fringe benefit (which we covered earlier).

Thirdly, you have to complete part 18 of the tax return - because the

Receiver wants to reconcile your financial status from one year to the next

- mainly because of the likely high numbers involved.

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