How can you take money out of your company or use its assets?
Shareholders of a small business can borrow money from the company or uses its assets for personal use. This happens often however few know how to deal with these transactions.
We explain below how this works.
1. Salary, wages or director fees
Shareholders can be paid money from their own company in the form of a salary, wages or directors fees depending on their employment contract. The company must withhold tax for these payments, pay the superannuation guarantee and the company must report these payments to the ATO. You must also declare these payments received from the company in your personal tax return.
2. Fringe benefits
FBT applies when employees or their family, including directors of the company, receive certain benefits from their employer (such as reimbursement of expenses, or a company car used for private purposes). The company must lodge an FBT return and pay the liability. You (the recipient of a benefit) do not need to report it in your tax return, unless it is a reportable fringe benefit.
3. Repayments of a loan by the company to the shareholder
If a shareholder has previously loaned to the company, the company can make repayments to them. The repayments are not tax deductible to the company, but any interest charged may be claimed. Under your personal tax return, you do not have to declare the repayments you received but you must declare any interest you received as assessable income.
4. Dividends
A company can pay a dividend to its shareholders as part of its profits. The dividend may be paid with a franking credit attached to it or as an unfranked dividend. The company must issue dividend statements and lodge a franking account within the tax return. Under your individual tax return you must report these dividends and any franking credits.
5. Loans from the company to the shareholder
A company can loan money to a shareholder, however before the company tax return is due or lodged (whichever comes first), the loan must either be repaid or it must comply with a written agreement between both parties. The shareholder must make a minimum yearly repayment back to the company by using the Division 7A calculator. You are not able to borrow further money to pay back the minimum. The company is able to declare dividends to reduce the amount of the loan and the shareholder/ director must report these payments in their personal tax return.