Withdrawals from a company
16 March 2013
Posted by: Herman van Dyk
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.
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 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.
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parties had a dividend been withdrawn instead of a salary.
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%.
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%.