From past experience, we find that many people in business who establish a company tend to find it difficult to distinguish between company money and personal money. However, it is important that this distinction is made and that the consequences of accessing company money are understood by company owners and directors.
By law, a company is a separate legal entity which should have its own bank account. Accordingly, all assets, liabilities, income and expenses of a company should be maintained and accounted for separately from the owners of that company. While many may see this as a disadvantage, the fact that a company is its own separate ‘entity’ at law can be a form of insurance, limiting the liability of company owners to the shares held.
Some common methods of getting money out of a company include:
Paying yourself a salary, is the most common way to withdraw funds from your business. Just like a normal employee, you would withhold PAYG Tax from these payments and you are likely to be required to make superannuation contributions. Other employment related on-costs would also need to be considered such as Workers’ Compensation insurance. Your gross salary would then need to be included as assessable income within your personal income tax return and the company would be entitled to claim a tax deduction for the same amount. The company would also be entitled to a tax deduction for superannuation contributions paid (when received by your nominated superannuation fund) along with other employment on-costs.
A dividend is a distribution of profits by a company to its shareholders. All dividends you receive are included within your assessable income and taxed at your marginal tax rate. If the company has already paid tax on the profits from which the dividend has been paid, a tax credit (known as a franking credit) of 30% may be claimable within your income tax return. However a company is not entitled to claim a tax deduction for dividends paid to its shareholders.
- Shareholder Loan
Simply withdrawing money from your business is likely to be treated as a shareholder’s loan. If not repaid within a short timeframe, such loans can be treated as deemed dividends with onerous taxation consequences to both the company and shareholder. Alternatively, a formal loan agreement must be established between the borrower and the company. Coming back to the distinction between company money and personal money, these loan agreements must be constructed in line with the ATO’s strict guidelines including benchmark interest rates and loan terms. Essentially, these ATO guidelines ensure that loans are on commercial terms and are ultimately repaid to the company.
As with all technical matters, it’s best to discuss your individual circumstances with one of our friendly staff at BLG Business Advisers (02) 4229 2211 to make sure you get the right advice for your situation.