Warning: Redrawing Investment Loans
ATO Focus on Investment Loan Redraws: Ensure Accurate Tax Reporting and Navigate Interest Claims with Expert Advice.
ATO Focus on Investment Loan Redraws: Ensure Accurate Tax Reporting and Navigate Interest Claims with Expert Advice.
PPSR explained: A key tool for safeguarding your interests in personal property and gaining an edge in insolvency situations.
Understanding GST on Foods: Chobani’s AAT Case Highlights the Complexities in Taxable and GST-Free Items.
Empower your organisation with a strong workplace culture. Essential for talent retention, employee engagement, and success in the competitive market.
Navigate small business complexities with expert partners. Essential support for establishing, growing, and safeguarding your business.
Your guide to strategic business planning: crafting a path, setting precise goals, and ensuring progress for entrepreneurial triumph.
Starting up a business requires a great deal of time and money. As you invest into your business, there might come a time when you’re able to take money out of your company to reimburse yourself. Although money and cash advances are the most obvious reimbursement, there are a myriad of ways owners seek payback from the assets of the company. This can be through dividends, salary and wages, the distribution of jobs to yourself, friends and personal expenses (dinners, coffees, nights out and so on). But, it’s important to note, that once the cash is in the company, it’s strictly company money.
In this blog, we look at the flow of money in a company and the problems that many business owners face when the line between company and personal expenses is blurred.
In the initial stages, several business owners provide loans to their companies. You may withdraw this money at any point as a loan repayment. While the loan repayment isn’t tax-deductible for the company, any interest paid to you will be, assuming that the borrowed funds have been utilised in the business operations (provided that interest has been charged on the loan).
Any repayments made by the company towards the loan’s principal won’t be considered income for tax purposes. However, any interest earned must be reported in your income tax return. It is important to maintain documentation for all loans, including the loan term and repayment details.
Dividends refer to the distribution of a portion of a company’s profits or retained earnings to its shareholders. Companies often pay dividends to their shareholders as a way to share their financial success and retain investor confidence. Dividends can be paid out in the form of cash, stock, or property, and are typically declared by the company’s board of directors. The amount of dividend payment and frequency of distribution may vary from company to company and is dependent on the company’s financial performance and management decisions.
If the company has franking credits from income tax it has paid, the dividends might be franked and the credits can often be used by the shareholder to reduce their personal tax liability. When we say “franking” we’re referring to a tax credit that a company receives for the income tax it has already paid on its profits. If a company has franking credits, it can use them to “frank” its dividends, indicating that the dividends have already been taxed. This allows shareholders to apply the franking credits to reduce their personal income tax liability, as they have already paid tax on the dividends received.
When a dividend is paid by a private company it must provide a distribution statement to the shareholders within 4 months after the end of the financial year. This gives private companies up to 4 months after the end of the financial year to work out the extent to which dividends will be franked.
If any of the shares in the company are held by a discretionary trust then there are some additional issues that will need to be considered, including whether the trust has a positive amount of net income for the year, whether the trust has made a family trust election for tax purposes and who will become entitled to distributions made by the trust for that year.
Private companies are often established with a modest share capital. However, if a company has a substantial share capital balance, it may consider returning a portion of the capital to its shareholders. Whether this is possible will depend on the terms of the company constitution and there are some corporate law issues that need to be addressed.
From a tax perspective, a return of share capital typically results in a decrease in the shares’ cost base for capital gains tax (CGT) purposes. This means that a larger capital gain could arise on future sale of the shares but there won’t necessarily be an immediate tax liability. Having said that, there are some integrity rules in the tax system that should be taken into account. The likelihood of these regulations being activated is typically greater if the company has profits that have been retained and may be distributed as dividends.
Shareholders of private companies often take money out of the company, but tax law (Division 7A) has strict rules around how this money is treated. This is to prevent owners from accessing funds in a way that avoids paying income tax. Division 7A ensures that any payments, loans, or forgiven debts are treated as dividends for tax purposes, unless there is a loan agreement that meets specific requirements.
To avoid this, the loan must be fully repaid or placed under a complying loan agreement before the company’s tax return due date. A complying loan agreement requires minimum annual repayments over a set period and a minimum benchmark interest rate. Otherwise, the amount is treated as a deemed unfranked dividend, which must be declared in the personal income tax return without franking credits. Even though the company may have already paid tax on this amount, you will be taxed on it again, causing double taxation. The rules around loan repayments are strict, and special rules can apply if a repayment is made but the same or more amount is loaned to the shareholder shortly afterward. The position needs to be managed carefully to avoid adverse tax implications.
Managing a company’s finances can be a daunting task, especially when it comes to understanding the complexities of taxation and legal compliance. As a business owner, it’s crucial to have a solid understanding of how to manage and use company money to avoid potential legal and financial issues down the line.
Seeking help from professionals, like our team here at Breathe Accounting, can be beneficial for ensuring that you are making the most out of your business’s financial resources while also complying with the relevant regulations. When you have the support of our expertise and guidance, you can focus on growing your business and achieving your goals, whilst we focus on the bookkeeping.
Don’t hesitate to reach out to Breathe Accounting for assistance with your accounting and financial management needs.