Your company is a separate legal entity from you as a director or a shareholder. The money your business earns is regarded as separate and belongs to the company. As a director of a company, you’ll need to understand how to account for and report any money you withdraw from your company or the tax implications of using its assets.
Not correctly reporting and keeping appropriate records for transactions can result in an unfranked deemed dividend being included in your assessable income or fringe benefits tax being payable.
How Do You Use My Company’s Money Or Assets For Yourself?
There are numerous reasons why you’ll need to access money from your business for private purposes. Money may be accessed through:
- Salary or wages
- Repayment of a loan you’ve previously made to the company
- A fringe benefit, such as an employee company car
- A loan received from the company
Different reporting and record-keeping are required for each circumstance.
Pro Tax Tip: Reporting applies to individuals or entities that are an associate of a shareholder, relative, partner, spouse or another entity controlled by the shareholder such as an associate company or trust, or someone who has previously been any of the former mentioned.
Recording And Reporting Company Money And Assets:
Wages, Salary or Director’s Fees
You’ll be paid a salary or wage from your company as a director or shareholder, depending in your contract with the company. It’s important to note that your company must pay withholding tax (Pay-As-You-Go), make super contributions and report payroll information to the ATO.
As a director of the wage or salary you receive, you’re obligated to report to the ATO your salary, wage or director’s fees in your individual tax return.
If you receive fringe benefits from your company, such as a company car, gym membership, reimbursement of private expenses or company assets that are used for private use, you company must lodge a Fringe Benefits Tax (FBT) return and pay a FBT liability if it applies.
As a recipient of that fringe benefit, you do not need to report the fringe benefit in your personal income tax return, unless it’s reported as a reportable fringe benefit amount on your income statement summary.
Repayments Of A Loan
The company can make loan repayments to a shareholder or director if they have previously loaned money to the company. The company cannot claim a deduction for any repayments it makes, but it may be able to claim a deduction for any interest it pays.
As a shareholder or director, you do not have to declare the repayments, but you must report any interest you receive from the company as assessable income.
A company can pay distribution of profits to its shareholders, which is known as a dividend. A dividend may include a Franking credit. A franking credit is the amount of tax already paid by the company and passed to the shareholder.
A company must issue a distribution statement. A distribution statement must include the amount of franking credit attached to the distribution as well as the franked portion. The company may be required to lodge a franking account tax return.
A shareholder must report dividends and franking credits in their personal income tax return. Income tax may need to be paid on dividends.
Loans From Your Company
If your company loans you money, you must be fully repaid, or have a signed and dated written agreement, have an interest rate for each year that equals the benchmark interest rate and not exceed the maximum terms of 7 or 25 years (under certain circumstances) before the company tax return is lodged.
A loan that complies with all requirements is known as a ‘complying loan’. A company is obligated to report interest earned.
As a shareholder, there are requirements that will need to be adhered to:
- you must make a minimum yearly repayment each year,
- you cannot borrow further money from the company to make the minimum repayment,
- you can make repayments on the loan using the dividends received from the company as long as you report the dividend in your personal income tax return.
Pro Tax Tip: If you take money out of your company or use its assets, make sure you declare it as salary or wages, a fringe benefit dividend or complying loan in your personal income tax return.
The ATO will and can ask for any of your business records. If you or your company has made a claim, you’ll need to make sure you can back yourself up. All companies need written evidence that records and explains their financial position and performance and enables accurate financial statements.
Keep records that include all of your company’s transactions including all income, payments and loans to and from shareholders and directors and their associates.
Financial records include invoices, receipts, cheques, books of prime entry, and working papers and other financial documents.
Records can be electronic but they must be a true and clear representation of the original. Even if your records are held by someone else, a bookkeeper or accountant for example, you are ultimately liable and responsible for providing copies to auditors or anyone entitled to inspect your documentation.
Pro Tax Tip: You must keep your records for at least 5 years from the date of lodging your most recent tax return. The ATO can ask for an audit your company within this period.
If you realise that you’re not correctly reporting these transactions or keeping appropriate records, talk to a registered tax professional and make sure that you correctly report the use of company money or assets in your next tax return.
ITP The Income Tax Professional have helped Australian individuals and businesses with all aspects of their tax, businesses finances and business growth. Phone 1800 367 487 and chat with a friendly tax accountant today.