Using Business Money and Assets

This information will help you if you are involved in running a business through a company or a trust and you are receiving financial or other benefits through the business.

Key Points

• There may be tax consequences if you take or use money or assets from your company or trust for private purposes.
• You need to:
  • report these transactions correctly in the company, trust and individual tax return
  • keep accurate records.

How to Record and Report the Use of Business Money or Assets

There are different ways to take or use money or assets from a company or trust. It’s important to understand reporting and record-keeping requirements for transactions.

Salary, Wages and Directors’ Fees

You can be an employee and a shareholder or director of the company that operates your business. You can also be an employee and a beneficiary of the trust that operates your business.

You must include any salary, wages or directors’ fees you receive from your business, in your individual tax return.

The company or trust that operates your business can generally claim a deduction for any salaries, wages or director’s fees paid.

The company or trust must:

• register for pay as you go (PAYG) withholding and withhold an amount from salary, wages and directors’ fees
• report the payment information to the ATO using Single Touch Payroll (STP)
• pay the amount withheld to the ATO and compulsory employee superannuation contributions to a complying super fund by the cut-off dates.

Example: taking money as salary or wages…

Daphne is the sole director of a company that sells speciality gift hampers to customers. She and her partner Jo are equal shareholders in the company. Before this financial year, Daphne ran the business as a sole trader.

As a sole trader, Daphne paid herself $1,500 a month out of her business account and into her personal account. Daphne doesn’t need to report this because it is already included as business income on her individual tax return.

When she sets up the company, Daphne becomes an employee of the company and is paid $1,500 a month as a salary. Her tax agent explains that there are different tax consequences now that the business is run through a company, which is a separate legal entity.

Daphne now reports the $1,500 a month income as salary in her individual tax return. The company reports business income and claims a deduction for her salary in its company tax return. The tax agent helps Daphne set up PAYG withholding and STP reporting, as well as meet her company’s superannuation guarantee obligations.

End of example

Fringe Benefits Tax and Allowances

Fringe benefits tax (FBT) may apply when employees or directors of a company or their associates receive benefits from the company or trust. This could be a payment or reimbursement of private expenses or being allowed to use business assets for private purposes (such as the business’s car).

Your company or trust:

• may be entitled to claim a deduction for the cost of providing fringe benefits
• can generally claim GST credits for items provided as fringe benefits
• must lodge an FBT return and pay any FBT that applies to the fringe benefits provided to the employees or their associates
• must keep all records relating to the fringe benefits it provides, including how the taxable value of benefits was calculated.

You don’t need to report the value of fringe benefits that you (or your associate) receive, in your tax return, unless they are included as reportable fringe benefits on your income statement.

Example: reporting a fringe benefit…

Sameera is the sole director and shareholder of a small tourism company that runs tours and owns 3 coastal holiday houses. Sameera is also one of 3 employees of the company.

Each employee is given the opportunity to stay in one of the holiday houses for up to 4 weeks each year during the off-peak season.

This year, Sameera and her family take up this offer and stay at their favourite holiday house for 2 weeks of their own holidays at no cost.

This is an employee’s private use of one of the company’s business assets. The company is providing Sameera, in her capacity as an employee, with a fringe benefit.

The company reports the fringe benefit in its FBT return and pays FBT on the benefit.

End of example

Distribution of Income and Profits

Dividends

If your business is run through a company, the company can distribute its profits by paying dividends to its shareholders, which can include you.

The dividend may include a franking credit (the amount of tax already paid by the company) which can be used by shareholders to offset their income tax liability.

The company:

• must issue a distribution statement to each shareholder who receives a dividend, showing the franking credit on the dividends paid
• may need to lodge a franking account tax return
• can’t claim a deduction for dividends paid as these are a distribution of company profit and not a business expense.

You must report any dividends you receive (and the franking credits on them) in your individual tax return.

Trust Distributions

If your business operates through a trust, the trustee may distribute a share of trust income to beneficiaries.

The trustee should advise and document in the trustee resolution:

• details of the beneficiaries
• their share of the net income of the trust.

If the trustee resolution is not made according to the terms of the trust deed, default beneficiaries or the trustee may be assessed on the relevant share of the trust’s income at the highest marginal tax rate.

Details of the trust distribution should be included in the statement of distribution which is part of the trust tax return. The trust can’t claim a deduction for distributions paid as it is a distribution of trust income and not a business expense.

If the beneficiary of a trust is a company, and the trust doesn’t pay the amount the company is entitled to, there may be tax implications.

If you have a trust within your family group, you may need to include a trustee beneficiary statement as part of the trust return lodged.

Lending Money or Assets

Companies Lend Money or Assets to Shareholders and Their Associates

When a company lends money or assets to a shareholder, the shareholder may be taken to have received a Division 7A deemed dividend if certain conditions are not met.

If this happens, you (the shareholder) need to report an unfranked dividend in your individual tax return. The company has to adjust their balance sheet to reduce their retained profits.

To avoid a Division 7A deemed dividend, before the company tax return is due or lodged (whichever comes first), the loan must either be repaid in full or put on complying terms.

To be put on complying terms, the loan must:

• be a written agreement, signed and dated by the lender
• have an interest rate for each year of the loan that at least equals the benchmark interest rate
• not exceed the maximum term of 7 years, or 25 years in certain circumstances when the loan is secured by a registered mortgage over real property.

The company must include any interest earned from the loan in its tax return.

As the shareholder, you:

• must make the minimum yearly repayment each year (use the Division 7A calculator to work this out)
• can’t borrow money from the company to make the minimum yearly repayment
• can make payments on the loan using a dividend declared by the company. This dividend must be reported in your individual tax return.

Example: loan received from the company…

Amir is the sole director of a company that provides administration services to other businesses. He and his partner Aiesha are equal shareholders in the company. Before this financial year, Amir ran the business as a sole trader.

Amir’s and Aiesha’s daughter is about to start high school and they have to pay $2,000 in school fees. The business has had a few good years and Amir decides to use the money from the business to pay the fees.

However, Amir knows that he can’t pay for a private expense using the company’s money without properly accounting for it. As the director, he decides the company will lend him and Aiesha the $2,000.

He draws up a written loan agreement for the loan to be repaid over 2 years, with an interest rate equal to the benchmark interest rate. The loan agreement identifies the company, Amir and Aiesha as the parties, and the repayment terms. It is signed by all parties.

The company lends Amir and Aiesha the money, which they pay back to the company with interest each year according to the agreement over the next 2 years. When Amir prepares the company tax return, he declares the interest as income for the company.

End of example

Trustees lend money or assets to beneficiaries and their associates

If you borrow money from the trust, you need to keep a record of it. If the loan is on commercial terms, you need to repay the principal and interest as per the loan agreement. The trust needs to report the interest in its tax return.

Repayments of Loans Made to Companies and Trusts

If you have lent money to your business, your business will make repayments to you.

Your company or trust can’t claim a deduction for any repayments of principal it makes but may be able to claim a deduction for interest it pays on the loan.

The company or trust should keep records of any loan agreements and documents explaining payments made to you.

You don’t have to declare the principal repayments, but any interest you receive from your business must be included in your individual tax return.

When You Take Money or Assets in Another Way

If you take money out of your company or trust or use its assets for private purposes in a way not described above, you or your company or trust may have unintended tax consequences. This may include triggering Division 7A.

To ensure your business transactions are transparent, you should:

• consider setting up a separate bank account for your business to pay business expenses, and don’t use it for private expenses
• keep records that explain all your business transactions, including income, payments and loans to you and your associates from the business, and loans from you to the business
• make sure that if your company lends money to you or your associates, it’s based on a written agreement with terms that ensure it’s treated as a complying loan
• report transactions correctly for tax purposes.

If you make an honest mistake when trying to comply with these obligations, tell us or your registered tax agent as soon as possible.

Example: repaying private expenses…

Jian is the director and sole shareholder of a plumbing company. Jian decides to have his home repainted, which he pays for using his company’s bank account. He meets regularly with his bookkeeper, who notices the unusual transaction.

The bookkeeper advises Jian that the transaction will be treated as a Division 7A dividend if he doesn’t pay the money back or make it a complying loan before his next company tax return is due. Jian has enough money in his personal bank account, so he decides to repay the company the full amount.

As he pays before the company’s lodgment date, there are no Division 7A consequences for Jian. He also takes his bookkeeper’s advice and stops paying for his private expenses with the company bank account.

End of example

Source: ATO