Dividends or Salary?
With the change in company tax rate from 28% to 27%, the question again arises whether to pay yourself in salary or in dividends.
Salary is straightforward, but you need to bear in mind the additional cost of monthly payroll services. This totals about R14 000 per year, or R10 500 net of tax.
The total annual cost in tax and payroll services for a sole director/shareholder who earns R2m gross is R760 191 and the net salary is R1 250 321
If no salary is drawn, but the R1 250 321 is lent to the director in monthly tranches, then interest at the official rate must be charged and this amounts to R6 698 per year extra income for the company and the tax on that is R1 809. The cost of the DWT return (after tax) is about R2 630.
In order to settle the debt (for the loans and the interest) a dividend of R1 564 710 must be declared and the Dividends Withholding Tax will be R312 942. The extra Income Tax paid by the company resulting in not having paid a salary is R578 728, so the total tax and cost is R896 109, or R135 918 more than if a salary had been paid.
Split salary and dividends
Now consider paying salary up to the point where the director would change from 41% to 45% marginal tax rate.
The Director pays R559 464 tax and the company pays R58 590 Dividends Withholding Tax, plus R108 985 Income Tax, R10 512 payroll services and R2 630 DWT return. Total R740 181.
This is R20 010 less than if the entire R2 000 000 were paid as salary.
But it doesn’t work
Why not? Because of s103(5) of the Income Tax Act –
(5) Where under any transaction, operation or scheme—
(a) any taxpayer has ceded the right to receive any amount in exchange for the right to receive any amount of dividends; and
(b) in consequence of that cession the liability for normal tax of the taxpayer or any other party to the transaction, operation or scheme, as determined before applying the provisions of this subsection, has been reduced or extinguished,
the Commissioner shall determine the liability for normal tax of the taxpayer and any other party to the transaction, operation or scheme as if that cession had not been effected.