Salary vs Dividends

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Purply

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Lets say hypothetically the following scenario exists.

You own an Closed Corporation from which you draw a monthly salary. The CC makes a yearly profit of 600k and your salary is 30k.

Do you increase your salary or start taking dividends?
 
I'd get an advice on what the best way to do so while avoiding tax would be.
 
Purply said:
Lets say hypothetically the following scenario exists.

You own an Closed Corporation from which you draw a monthly salary. The CC makes a yearly profit of 600k and your salary is 30k.

Do you increase your salary or start taking dividends?
Click to expand...

Put business expenses through CC to reduce profit
Keep salary the same
Pay tax @28% on CC profits
Draw annual dividend and pay dividends tax
 
Depends on your ownership motive. If you approach your business as primarily a place to work and have no long term exit intention or pplan, then bump your salary. On the other hand, if you approach your business as an investment that needs to create wealth for you upon exit, then pay out dividends to maximise the value of your business.
 
edit: Register for Turnover Tax and then take a dividend once a year.
 
Purply said:
You can only qualify for Turnover Tax if the companies turnover is less than R1 million pa, which is not the case.
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Sorry, misread your post. Thought the turnover was R600k as opposed to >Rmil
 
If your cc makes less than R 1m have you considered applying for Small Business Tax Rates?

The R 1m is based on turnover though not profit,
dont know your company details but could be worth looking into.
 
Bump up your salary. Your marginal tax rate is not 38% (28% company tax + 10% Dividend withholding tax)
 
signates said:
Bump up your salary. Your marginal tax rate is not 38% (28% company tax + 10% Dividend withholding tax)
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Afaik dividend tax has increased to 15%, also cc's don't pay a flat 28% company tax, it's based on a net profit scale?
 
Maybe we should take the below into consideration:

Salary Tax on 32k = roughly 28%
Small Business Tax on 600k = roughly 15%
Dividend Tax = 15%
 
Yes, DWT is 15%.

Be careful regarding Small Business Tax. You need to qualify as an SBC in order to get the benefit of the reduced rates.
 
Biscuit1018 said:
Put business expenses through CC to reduce profit
Keep salary the same
Pay tax @28% on CC profits
Draw annual dividend and pay dividends tax
Click to expand...

Incorrect. There is progressive taxation on small businesses up to 550K. The effective company tax rate on the company would be around 12%, not 28%. Dividends withholding tax is 15%, so you're looking at 27% tax vs 40% marginal rate. An accountant will be able to advise how to do the split.

I'm actually surprised at how few people know this, and this right here is the reason to open a proper company rather than trying to do things as a sole proprietor.
 
JayM said:
Incorrect. There is progressive taxation on small businesses up to 550K. The effective company tax rate on the company would be around 12%, not 28%. Dividends withholding tax is 15%, so you're looking at 27% tax vs 40% marginal rate. An accountant will be able to advise how to do the split.

I'm actually surprised at how few people know this, and this right here is the reason to open a proper company rather than trying to do things as a sole proprietor.
Click to expand...

Thanks for reaffirming this JayM

On the DWT side of things, I assume once the cc has paid the 15% Tax, the amount paid to the member would not affect his personal income tax? Or will SARS nail you there again....
 
Purply said:
Thanks for reaffirming this JayM

On the DWT side of things, I assume once the cc has paid the 15% Tax, the amount paid to the member would not affect his personal income tax? Or will SARS nail you there again....
Click to expand...

There will be no further tax.

Foreign dividends, however, is a completely different story...
 
Paying dividends to members instead of big salaries to staff also has the effect of looking better to potential investors - if that is something you would consider in the future.
 
heartbroken said:
Paying dividends to members instead of big salaries to staff also has the effect of looking better to potential investors - if that is something you would consider in the future.
Click to expand...

Hmm yes I see what you did there, thanks for pointing it out.
 
Purply said:
Lets say hypothetically the following scenario exists.

You own an Closed Corporation from which you draw a monthly salary. The CC makes a yearly profit of 600k and your salary is 30k.

Do you increase your salary or start taking dividends?
Click to expand...

Decrease your salary and never take dividends. Big salaries and nice dividends are for stupid business owners.

There is this need to own everything in your name among many business owners that i just don't understand. Just channel some of your expenses to the business and find a legitimate reason for it. It is easy as capitalism by default gives you license to walk the thin line.

Why on earth would you pay tax TWICE on the same income by taking a double tax dividend. Why would you put yourself in a 30% tax bracket while you could be in 18%. You can legally enjoy a part of your salary and a yearly dividend from within your company.

Let your company supply your accommodation to you.
Drive a company car totally tax free just by making sure you fall within a certain criteria.
Have that yearly holiday abroad legally as a business expense and tax benefit just by taking a business customer along.
ANYTHING you do with a business customer can legally be claimed as a tax benefit within the rules of course.

You can enjoy a big part of your salary without having it in your name. The business is still yours, it's just a different entity.

This is how the big boys do it. The difference between poor and rich is often just paperwork. Get yourself a decent tax advisor worth his fee.
 
JustAsk said:
Decrease your salary and never take dividends. Big salaries and nice dividends are for stupid business owners.

There is this need to own everything in your name among many business owners that i just don't understand. Just channel some of your expenses to the business and find a legitimate reason for it. It is easy as capitalism by default gives you license to walk the thin line.

Why on earth would you pay tax TWICE on the same income by taking a double tax dividend. Why would you put yourself in a 30% tax bracket while you could be in 18%. You can legally enjoy a part of your salary and a yearly dividend from within your company.

Let your company supply your accommodation to you.
Drive a company car totally tax free just by making sure you fall within a certain criteria.
Have that yearly holiday abroad legally as a business expense and tax benefit just by taking a business customer along.
ANYTHING you do with a business customer can legally be claimed as a tax benefit within the rules of course.

You can enjoy a big part of your salary without having it in your name. The business is still yours, it's just a different entity.

This is how the big boys do it. The difference between poor and rich is often just paperwork. Get yourself a decent tax advisor worth his fee.
Click to expand...

Who stepped in your porridge this morning?
 
Purply said:
Who stepped in your porridge this morning?
Click to expand...

Yeah I'd like to know too. Everything he posted screams 'SARS, PLEASE AUDIT ME!'. While you can write off some expenses, wangling a car or plenty of overseas trips when they aren't fully justified will get you audited eventually, and is only really going to save you 5-10K in tax. At some point the time and aggravation of gaming the system is not really worth it.
 
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