Starting up a business not only consumes a lot of time but also consumes a lot of cash, and a lot of money is usually paid in the form of tax. Therefore, it sounds good when your business is all set to pay you back. There are various ways business owners look for payback from the business as they already have invested their money, from salary, dividends and wages, jobs for underqualified family members to cash advances and expenses for personal purposes like school fees and night out used as a company expense.
Repaying Loan Amount
If you’ve given your business a loan, you can use this money to repay a loan. The loan repayment amount is not deductible to the company, but any interest payments made to you will be as long as the borrowed loan amount has been used in the company’s business activities.
On the contrary, any loan repayments made by the company on the loan principal are not considered income for tax purposes but you’ll have to declare any interest earned in your income tax return. All loans, including the repayments and loan terms, need to be documented.
Dividends: Paying Out Profits
Basically, dividends show the profits of the company being paid out to the company’s shareholders. If the company’s franking credits from income tax it has paid, the dividends can be franked and the shareholders can use the credits to minimise their personal tax liability.
If a private company pays a dividend, it must give a distribution statement to the shareholders within 4 months after the end of the fiscal year. As a result, private companies can work out the extent to which dividends will be franked as they have up to 4 months after the end of the fiscal year.
Various issues need to be considered if any of the shares are carried out by the discretionary trust and those issues might include, whether the trust has enough net income amount for the year, whether for tax purposes, the trust has made a family trust election and who’ll be liable to distributions that are made by the trust for that year.
Repaying Share Capital
Various private companies have a small amount of share capital. However, if a company has a large share capital balance, then the company might be able to undertake a return of share capital to the shareholders. The possibility will be based on the terms of the company constitution, and some corporate laws need to be addressed.
From a tax perspective, share capital return will reduce the cost base of the shares for CGT purposes, which means, a larger capital gain could increase on the future sale of the shares, however, there will be no immediate tax liability. In the tax system, some integrity rules need to be considered. The risk of these rules being triggered seems to be higher if the company’s retained profits could be paid out as dividends.
Shareholder Loans, Forgiven Debts, and Payments: Using Company Money
Some rules in the tax law identify how the money is used, which is taken out of the company. Division 7A is designed to prevent business owners from accessing funds in a way to avoid income tax. The amounts taken by the owners from a company bank account are debited to a loan account of a shareholder in the financial statements, Division 7A makes sure that any loans, payments, or forgiven debts are treated as if they were dividends for tax purposes unless there is a loan agreement that meets strict requirements. These dividends can’t be franked.
If you’ve taken money from the company bank account, then the main methods of avoiding this deemed dividend from being activated are to make sure that the loan is repaid or used under a complying loan agreement before the due date and actual filing date of the tax return of the company for that year. To be a complying loan agreement, the agreement needs minimum annual repayments that need to be made for a set period of time and there is a minimum benchmark interest charge that applies – currently 4.77% for 2022-23.
The rules are very strict when it is a matter of loan repayments. After repaying the amount but the same amount or more is loaned to the shareholder shortly afterwards, then some special rules can apply to ignore the repayment.