Your company is ticking along nicely, and you’ve generated some cash in the business – so why can’t you take it out? It’s your money, right?
Well… technically it’s not. Money that the company has earned, even if you are the shareholder, belongs to the company.
There are, however, ways in which you can access company funds – but any time you do, you need to consider the tax implications!
There are three common methods for directors to withdraw money from a company, being:
Whilst Director’s salary, wages, fees and Dividends all attract standard marginal tax rates in the tax year they’re paid, Director’s loans allow you to shift the timing of your tax obligations… BUT only if managed carefully and proactively.
So, before you start pulling money out of the company, you need to consider the following…
Director’s loans have a few names – you may have also heard them called Div 7A loans by your accountant.
A Div 7A loan is basically a ‘loan’ between a company and its related parties – usually Directors. These loans generally run for a maximum of 7 years. They can be extended to 25 years if secured by registered mortgage over real property (usually land and buildings) – given the complexity of this process extending beyond 7 years is less common.
Whilst the loan itself doesn’t attract income tax it MUST be repaid, along with Div 7A interest (2024 rate is 8.27%), and the funds that will be used to repay the loan we be taxed at your standard marginal rate.
There are several ways in which they can be repaid, including:
As with all things in life, whether or not this is actually a good idea is another thing.
There are several pros and cons that need to be taken into account before deciding on whether or not to take on a Div 7A loan.
QBCC regulations generally do not allow you to include related party loans (i.e. loans owed to the company) in your Net Tangible Asset (NTA) calculations, unless strict requirements are met. Having these loans disallowed may result in failure of this aspect of QBCC Minimum Financial Requirements.
John is a builder and has recently finished up some great projects. The company has met all its financial obligations, and as a result of these profitable projects, has some cash reserves.
His family car has broken down, and John wants to buy a new one. Rather than taking out a loan, John decides to take money out of the company to purchase the car.
John enters into a Div 7A loan arrangement with the company and pays back the money over 7 years in order to manage his personal tax position.
Barry has decided to surprise his wife with a luxury holiday to Europe for their 20th wedding anniversary. In order to fund this trip, Barry has taken out money from his building company.
They have a lovely trip, and when they come back, Barry continues working.
No provisions have been put in place to repay this money back to the company, as Barry believes that he is entitled to this money being the sole Director and shareholder of the company.
Barry lodges his income tax return without a loan arrangement in place.
Due to there being no loan arrangement in place, the loan is deemed to be fully taxable in the year it was taken. The total amount will be included in Barry’s personal tax return, but he won’t get a credit for any tax already paid by the company on the money.
Whilst Div 7A loans seem like a great idea, they can cause huge problems if not managed correctly, particularly for QBCC licence holders.
Get in touch if you’d like to discuss Div 7A loans further – and find out if they’re a good option for you.
