Interest-free loan to a shareholder: possible deemed dividend
10 November 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: I have a
question regarding a deemed dividend. A company’s balance sheet reflects a
debit loan to an individual shareholder in the February 2014 financial
statements. There is no interest charged on the loan. It is therefore my
understanding that the interest that should have been earned on this loan (at
the official rate) is a deemed dividend in terms of Section 64E.
However the company has an assessed loss and no reserves and
only R100 contributed tax capital. I understand that in terms of the old STC
rules there could be no deemed dividend but I am questioning the scenario
regarding Dividend Withholding Tax.
Please advise if my reasoning below is correct:
In terms of the
definition of dividends as per the Income Tax Act, any amount transferred or
applied, to the extent that it results in a reduction of the company’s
contributed tax capital, is excluded from the definition of dividend.
The company’s equity account as per the annual financial
statements reflects an accumulated loss, contributed tax capital is R100 and by
implying that the loan to the shareholder will be a dividend, such dividend
would reduce the contributed tax capital of the company. The amount is
therefore excluded from the definition of dividends and no dividends tax is
payable. If my reasoning is not correct, could you please advise if there is
any circumstance under which a non-interest bearing loan account to an
individual shareholder will not be subject to Section 64E?
A: Our guidance
assumes that the shareholder is a connected person in relation to the company
and that the debt arose by virtue of any share held in that company by the
The amount of the dividend that is deemed to have been paid
in terms of section 64E(4) is the greater of the market-related interest in
respect of that debt, less the amount of interest that is payable to that
company in respect of that debt for that year of assessment; or nil. It is not 100%, as you indicate, "the
interest that should have been earned on this loan (at the official rate)” that
is deemed a dividend. It is true that
the ‘market-related interest’, in relation to any debt owed to a company means
the amount of interest that would be payable to that company on the amount
owing to that company in respect of that debt for a period during a year of
assessment if the debt had been owed for that period at the official rate of
interest as defined in paragraph (1) of the Seventh Schedule.
The second point is that section 64E(4) deems a dividend to
be paid under the circumstances listed in the section. It does not deem the amount to be
"transferred or applied by” the company for the benefit or on behalf of any
person in respect of any share in that company by way of a distribution made by
the company. In fact, there is no actual
distribution by the company.
In addition, whilst not a tax related issue, we submit that
the directors of the company, in approving the loan, had to apply the solvency
test. The fact that there is a loss will
therefore not mean that section 64E(4) does not apply.
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.