Is it better to pay a bonus and the owner to settle their debit loan versus declaring a dividend if they are in the highest tax bracket? Are there any limitations with declaring a bonus at the end of the year?
Important:
This answer is based on tax law for the tax year ending 28 February 2019.
Answer:
You are reminded that the service offered by us is limited to guidance only and we can’t provide answers to the two requests. Guidance implies that sources or references relevant to your request are provided, but that ultimately your professional judgment is required to be applied to the specific circumstances.
There are a number of issues that you must consider in this instance before you can correctly advise your clients.
The first important considerations are the following:
We accept that, because there is a tax benefit, the parties would be able to rebut the presumption of purpose – see section 80G of the Income Tax Act. You are reminded that, under proviso (ii), of section 10(1)(k)(i), the exemption is not available in respect any dividend received by or accrued to a person in respect of services rendered or to be rendered or in respect of or by virtue of employment or the holding of any office, other than a dividend received or accrued in respect of a restricted equity instrument as defined in section 8C held by that person or in respect of a share held by that person.
We accept that the Companies Act requirements were observed in granting the loan to the holder of shares. For the amount transferred or applied by a company to be a dividend, it must be in respect of a share in that company. For instance, a payment in respect of services rendered would not be a dividend. The same applies where the debt doesn’t carry a market-related interest – see section 64E(4) of the Income Tax Act.
You must remember that a bonus is ‘variable remuneration’ – see section 7B(1) of the Act. This is an important consideration as the timing of the accrual, to the individual, and the incurring of the expenses, to the company, will be when it is paid or becomes payable.