Borrowing from your own company

When you run your own company, it is easy for your finances to be mixed up with those of the company. It is difficult to know day to day how much money you are entitled to withdraw from your company, and you can often end up owing money to your company. This can create serious tax issues.

Division 7A of the Income Tax Assessment Act provides that, if you or your family take money from your own company it will be deemed to be a dividend, unless it is a proper payment for some other reason, such as salary or formal commercial loan. As the payment is deemed to be a dividend, it is added to your taxable income. Worse still, you receive no franking credit for the payment, as you would if it were a proper dividend, and the company receives no tax deduction for the payment to you. In effect, a loan account owed by you to the company is taxed punitively, by being taxed in your hands, with no corresponding credit for the company.

 

A solution is to have a formal loan agreement. Division 7A does not apply where there is a written loan agreement, which complies with the Act, and you comply with the terms of that loan agreement. The requirements of such a loan agreement are somewhat complex but, basically, require the loan to be repaid by instalments over 7 years or, in the case of a loan secured on real property, over 25 years, and for you to pay proper interest on the loan.

 

The safest solution is that, at the outset, you should enter into a formal loan agreement with your company, complying with Division 7A, which applies generally to any monies which you may end up owing the company. In this way, you will never be subject to punitive tax, provided that you make the minimum repayments required under the loan agreement.

If you require information, please contact Andrew Somerville.

 

 

 

 

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