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Withdrawals from a company

16 March 2013   (0 Comments)
Posted by: Herman van Dyk
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By Michael Stein (Friday Page)

Given the 2014 rates of tax for companies and individuals announced in the Budget on 27 February 2013, and purely from the tax point of view, it is better to operate through a company than as a sole trader, because companies pay a flat rate of income tax of 28%, while the maximum marginal rate of tax for individuals is 40%.

If a company derives a taxable income of R100 and pays normal tax of R28, it is left with an after-tax amount of R72. But if an individual who has other taxable income and so pays the maximum marginal rate of normal tax of 40% derives further taxable income of R100, he or she will pay normal tax of R40 and will be left with an after-tax amount of R60 from this source.

However, if the individual operates through a company and wants to access its after-tax funds as a dividend subject to the 15% dividends tax, the effective rate of tax of the company, allowing for both normal tax at the rate of 28% and dividends tax (effectively 10,8% of the company’s after-tax taxable income, that is, 15% of R72), amounts to 38,8%. There will then be no further tax to pay for the individual.

But the individual who works for the company may choose to take a salary for his services rather than a dividend. The salary will be deductible by the company as expenditure incurred in the production of income and will be taxed in the shareholder’s hands at his marginal rate of tax.

The salary will be a more efficient method for the working shareholder to access the funds of the company as long as it attracts an effective rate of tax in his or her hands that is less than the rate of 38,8% that would have been payable by the parties had a dividend been withdrawn instead of a salary.

The marginal rate of tax for individuals reaches this level, ignoring rebates, when his taxable income begins to exceed an amount of R638601, when the marginal rate of tax on additional taxable income is 40%.

If provision is made for the primary rebate of R12080 for persons aged under 65, the ‘ideal’ salary goes up to R668800, as long as this is the sole source of taxable income for the individual concerned.

Any further withdrawals from the company may then be by way of dividends subject to the dividends tax, since this would then limit the effective rate of tax on these further withdrawals to 38,8%.


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