12 November 2019 at 9:15
I have a loan with my company (payable from the company). I would like to know what the effects are that we need to consider regarding interest-free loans? I am aware that we can create a tax deduction for the company and I will have the interest exemption, but I feel there is something I'm missing?
Also if the shareholder already exceeded his R23k exemption, will it be fine if we do not levy any interest on this loan? Will there be any unknown tax consequences for that?
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12 November 2019 at 10:28
You should have a Shareholder loan account in the books of your business which you use to book the transactions so that you have an audit trail of the transactions between yourself and the business. You can also charge a market related interest on this loan to take advantage of the tax deduction in your business (assuming it's a payable balance) and the annual interest exemption (R23 800) in your individual capacity.
Unfortunately the loan does need to attract a market related interest rate and you therefore can't cap the interest at the exemption amount of R23K. The interest does not necessarily need to be physically paid each month by the company to you - instead it can be capitalised each month to increase the value of the loan.
If a market related interest is not charged, s7C of the Tax Act kicks in which applies to interest-free or low-interest loans i.e the difference between the actual rate of interest levied on the loan and the official rate of interest will be deemed to be a donation in your hands and subject to donations tax of 20%.