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Revealed: Crucial tax implications for company directors

by , 04 September 2013
Legislation introduced a few years ago has changed the game for directors of companies. This spares them from provisional tax and subjecting their salary to Pay As You Earn (PAYE). Despite being around a few years, many companies still get it wrong. Read on to find out how company directors must be remunerated and taxed so you can avoid tax penalties.

In the past, company directors had to become provisional taxpayers. But these days, directors' remuneration is subject to PAYE.

It's important that your company gets this right! SARS doesn't tolerate non-compliant behavior.

Here's how to tax your directors' remuneration

According to the Practical Tax Loose Leaf Service, regardless of how much they actually received or when they received it, SARS deems company directors to have received their estimated remuneration on a monthly basis.

And that means if don't have final figures for your director's remuneration for the last year of assessment, you need to use those for the prior year and increase it by 20% to estimate their costs.

Here's an example of how this works: Mr Jones earns R15 000 a month during the 2012 tax year.

The last year's actual earning figures aren't available yet, so he must use the prior year's information. Mr Jones earned R14 000 per month in the 2011 tax year, he also received a bonus of R5 000. This means his total earnings were R173 000.

His deemed earnings are R17 300 per month (R173 000 + 20% = R207 600; divided by 12 months = R17 300).

In cases where a person's appointed as a director of a private company during the year of assessment, but wasn't previously an employee of that company, the company my pay PAYE on the actual remuneration he's paid during that year of assessment.

And remember, in cases where the person ceases to be a director, but remains an employee of the company, you can't use the formula. You need to deduct PAYE from his actual remuneration, just like you would for any other employee.

It's crucial you make sure your PAYE payments are made to avoid penalties.

Your company is liable for the payment of the PAYE it withholds from the director.

But it also has the right to recover this from him. You can do this by deducting it from his future remuneration or from his loan account.

Your director won't be entitled to an employee's tax certificate (IRP5), until your company has actually recovered the PAYE from him.

'What this means is that your director must manage the company cash flows carefully, to ensure that the business is always able to pay the monthly PAYE due,' says the Practical Tax Loose Leaf Service.

Once the PAYE has been recovered, your company must issue the IRP5 certificate within 60 days of the tax year end or within 60 days of the employee's terminated employment. The IRP5 must reflect the total employees' tax withheld.

Remember, the IRP5 certificate is a receipt of taxes paid on the employee's behalf by his employer. This is why you (the employer) can't issue an IRP5 certificate until you've recovered the tax from your company's directors (your employees).

Make sure you follow this procedure to tax your director's remuneration right.

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