What is a dividend? It’s a portion of a company’s profit paid to common and preferred shareholders.
What is return on investment (ROI)?
Return on investment, or ROI, is the most common profitability ratio. There are several ways to determine ROI, but the most frequently used method is to divide net profit by total assets. So if your net profit is R100 000 and your total assets are R300 000, your ROI would be 33 or 33 %
Return on investment isn’t necessarily the same as profit
ROI deals with the money you invest in the company and the return you realise on that money based on the net profit of the business. Profit, on the other hand, measures the performance of the business.
Don’t confuse ROI with the return on the owner’s equity. This is an entirely different item as well. Only in sole proprietorships does equity equal the total investment or assets of the business.
Use ROIs in several different ways to gauge the profitability of your business
For instance, you can measure the performance of your pricing policies, inventory investment, capital equipment investment, and so forth. Some other ways to use ROI within your company are by:
- Dividing net income, interest and taxes by total liabilities to measure rate of earnings of total capital employed.
- Dividing net income and income taxes by proprietary equity and fixed liabilities to produce a rate of earnings on invested capital.
- Dividing net income by total capital plus reserves to calculate the rate of earnings on proprietary equity and stock equity.
How to distribute profit as a sole proprietor?
Scenario 1
Workout the tax you would pay if you worked on the basis of a salary paying PAYE monthly. The amount of tax (percentage to be deducted) that you would pay would be determined by your monthly salary.
Scenario 2
Do a second calculation declaring a dividend. The tax on a dividend is 10%, but you must also include tax on any profit in the CC which is calculated at 28%. Compare the two answers and you would then be able to decide which route would work best for you. Without details with regard to turnover and profit it isn’t possible to provide a more accurate answer. There are many solutions which can be applied to this situation.
How are dividends paid to partners in a CC and what are the tax implications?
Cash dividends are the most common method of sharing company profits and are paid directly to shareholders.
As a partner of a Closed Corporation it is necessary for you to sign a copy of the financials at the end of each financial year. You are entitled to keep a copy. If you feel that something is not correct, take the copy of the financials to an independent professional to investigate and confirm exactly what transactions took place.
As there are partners in the business there should also be a partnership agreement. This agreement spells out how the owners will decide when and how to pay out profits. Check your agreement for details. If there aren’t any, then you may once again have to seek professional assistance.
This is why it is so important to understand the terms of a partnership agreement before signing it. Partnership agreements can cover many issues, such as how profits are paid out, when and how the agreement can be changed, the ownership split, job descriptions, what happens in the event of the death of a partner and it should also contain an exit strategy if any of the partners who may wish to move on.
Dividend Payments
Dividend payments are considered part of your ordinary income and are taxed as such, the same as if the taxpayer had earned the income working at a salaried job. These dividends are usually taxable to the recipient in the year they are paid.
There are three difference tax formulas which apply to Closed Corporations:
How much tax you would be liable for depends largely on how the CC has chosen to deal with tax. There are three ways in which tax can be paid:
What is an Assessed Loss?
Assessed loss can be a valuable asset. If a CC makes a tax loss in a single tax year, the tax payer is allowed to carry the loss into the following tax year and the years that follow until the loss has been absorbed. But, if the CC is dormant the assessed loss is totally forfeited. It is highly recommended that you seek the services of a tax professional, or accounting officer who can assess your tax situation and make the most cost effective recommendations based on your actual circumstances.
What is Dividend Tax?
Dividend tax is paid when a company or close corporation transfers any amount to its shareholders or members. Any distribution from a company to its shareholders must be either a dividend, or repayment of capital. When Dividend Tax is implemented the tax burden shifts from the company paying out the dividend to the shareholder who receives it. The rate is 10% for both STC (Secondary Tax on Companies) and Dividend Tax.
For information
www.sars.gov.za