Company Money: A guide for owners

Considering how much money, time and effort it takes to invest in, create and sustain a business in its early stages, you would think that it makes sense to receive that money back from the business once it has reached a point of financial stability. Bu it’s actually not as straightforward as you might think, so let’s dive in and find out more.

Some business owners like to get creative with their company money and use different techniques to get the money out of the business and into their bank accounts. Some of these simply include wages, dividends, and salary. But it is not uncommon for some company owners to employ members of their family in the business, or to incorrectly charge personal expenses under business, such as entertainment or household bills. This could potentially cause issues for the business owners in the long term, so let’s take a deeper look.

Repaying Money loaned to the company

You are definitely able to receive money back from the company that you have lent as a loan. This is considered to be a loan repayment to you, and is not tax deductible to the company. The amounts that would be deductible are interest payments, only if there was interest charged on the loan, as well as the money that was being used for business related activities.

As repayments made on the loan are not considered income for tax purposes, when it comes to tax time, it is your responsibility to declare if you have earned interest. You need to ensure that all details are recorded correctly, from the amount of the loans, any repayments that were made, and the term of the loan(s).

Dividends: Paying out profits

Firstly, what are dividends?

Dividends are a portion of the total profits that the company makes, that are distributed on a quarterly, monthly or yearly basis to its shareholders. Sometimes the dividends are franked, which means that the shareholder can benefit by receiving a tax credit when they lodge their tax returns. But keep in mind that this only happens when the company has existing franking credits, due to income tax that has already been paid.

A company has four months from the end of each financial year to provide a distribution statement to its shareholders. The reason for this is so that the company has enough time to calculate which dividends will be franked.

Another issue to take into consideration is whether the company has any shares being held by a discretionary trust, especially if the net income for the financial year was a positive amount. It is also relevant whether the trust has created a family trust election for tax purposes, as well deciding who receives entitlement to the dividend distributions made by the trust.

Repaying share capital

The majority of private companies are established on a low amount of share capital. There is potential for a company to re-distribute more of the share capital to the shareholders if the company received a significantly larger amount initially. The company would need to look into their constitution to see if this would be applicable to their situation and they would also need to take into account certain issues related to corporate law.

Usually a return of share capital would significantly lower the cost base of shares for CGT purposes. This increases the amount of capital gain that could occur on the future sale of shares, but there won’t be an immediate tax liability.

However, you do need to consider certain integrity rules in the tax system. If the company does hold onto profits that have the potential to be dividends, the likelihood of the tax rules being flagged does increase.

Shareholder loans, payments, and forgiven debts: Using company money

Division 7A is the name of the tax law which refers to money being taken out of a company and the rules around it.

It is an especially complex taxation law and its main purpose is to avoid business owners from being able to remove money from their business without having to pay tax on it. Division 7A automatically treats any payments taken out of the business as dividends for tax purposes. These ‘deemed’ dividends cannot normally be franked.

If you would like to avoid the ‘deemed’ dividend to be flagged, you can make sure the loan is paid in full or placed under a complying loan agreement prior to the due date and lodgement of the company’s tax return in that financial year.

A complying loan agreement is one in which minimal annual repayments are made over a specific period of time and it incurs a minimum benchmark interest rate of 4.77% (as of the 2022-23 financial year).

A simple example is that any money taken from the business for personal use (e.g a home loan), you are required to pay the full amount back, unless you have put a Division 7A Loan agreement in place. Only if neither of those have been completed, the amount will be considered a deemed unfranked dividend. It will then need to be declared in your personal income tax return, and would not receive any benefits of franking credits.

Essentially you would be taxed twice, and forfeiting the ability to receive a credit for any tax previously paid on the amount by the company.

The ATO is extremely strict on the Division 7A repayments, even going to extra lengths to monitor them. One example being that if an individual makes a repayment on the loan, but then a similar amount is loaned again in a short timeframe – certain rules are in place to ignore that initial repayment altogether.

In summary, as a company owner, you need to ensure that these loans and repayments are given the appropriate care and management, so that you can stay clear of any unwanted negative consequences.

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