On the right side of Directors’ Loan Accounts
Provided the company owes the funds in question to the director concerned, there are no income tax implications for the director or for the company. It is advisable that such loans are regulated and supported by appropriate loan agreements, with interest clauses that are market related.
Loans owed to the director are another matter, giving rise to taxation obligations. Any loan owed to the company by a director gives rise to a deemed dividend on the last day of the financial year, with deemed dividend tax payable by the company at 20% of the value of the loan account at year end.
- Declare a dividend equal to the value of the debit balance and pay the dividend tax to SARS.
- Declare additional salary or a bonus equal to the net value of the loan account. The company will include the resulting PAYE in its final EMP201 and payment to SARS, for the financial year in question.
- Raise interest income on the balance of the loan account at year end at a Prime-linked rate, to avoid any deemed dividend arising on an advantageous interest rate granted.
It is important to note that the first two options above would need to be exercised prior to the end of the financial year to ensure dividends are declared prior to financial year end and/or the EMP501 for that year bears the implications of any actions taken arising from debit loan balances.