It is important for you to report assets and money taken from a trust or company as income in your tax return.
Who must know?
This information helps you understand how to record money taken from your business, or business assets used for personal purposes, for tax purposes. If you are unfamiliar with this concept, you can contact accounting firm Port Melbourne.
This is applicable if you are an individual who is:
- A director, employee, or shareholder of a company that runs a small business.
- A beneficiary, trustee, or employee of a trust that runs a small business (your business)
- A director of a corporate trustee for a trust that runs a small business (your business)
- Or has been an associate of a shareholder of a private company.
How do you use assets or money from a company or trust?
The most common ways you may take money or assets from a company or trust are:
- Salary and wages
- Fringe benefits, such as an employee using the business’s car
- Directors’ fees
- Dividends paid by the company to you as a shareholder
- Trust distributions by the trust to you as a beneficiary
- Loans from the trust or company
- Allowances or reimbursements of expenses received from the trust or company.
There are record-keeping requirements for all of these types of transactions.
How do you record and report the use of your business money or assets?
You need to maintain the right records that explain financial transactions where you have:
- Taken money or assets from your business
- Used the business’s assets for personal purposes.
The ATO view on minimum record-keeping standards is offered in Taxation Ruling TR 96/7. You are required to meet reporting requirements for these transactions.
Salary, wages, or directors’ fees
You can be a director, employee, and shareholder of the company that runs your business. You can also be a trustee, employee, and a beneficiary of the trust that runs your business. You need to include any salary, directors’ fees, or wages you receive from your business as assessable income in your individual tax return. The trust or company that runs your business can claim a deduction for any wages, salaries, or directors’ fees paid if it complies with the pay-as-you-go withholding and reporting obligations for each payment. Your business must:
- Register for PAYG withholding and withhold an amount from wages, salary, and directors’ fees.
- Report PAYG withholding information in its BAS.
- Report the payment information to the ATO using STP unless covered by a deferral or exemption.
- Pay the amount withheld to the ATO and make compulsory employee superannuation contributions to a complying super fund by cut-off dates.
Fringe benefits and allowances
FBT may apply when an employer provides certain benefits to its directors, employees, employees’ families or other associates. These benefits can include a payment or reimbursement of private expenses or may allow the use of business assets for personal use. Your company or trust:
- May be liable to claim a deduction for the cost of providing fringe benefits.
- May claim GST credits for items offered as fringe benefits
- Must file an FBT return
- Must keep all records relating to fringe benefits it offers.
Distribution of income and profits
Dividends
If your business runs through a company, it can divide profits among shareholders as dividends. The company may allocate franking credits, showing tax already paid on its profits, which shareholders can use to offset their income tax. The company needs to provide shareholders with a distribution statement representing the franking credits, dividends, and franking percentage. It may also need to file a franking account tax return. You need to report dividends and franking credits in your tax return as assessable income. The company won’t be able to claim a tax deduction for dividends paid, as they are distributions of profit, not business expenses.
Trust distributions
If your business runs through a trust, the trustee needs to document beneficiaries and their share of trust income in a valid year-end resolution. Trust distributions need to be reported in the trust tax return and are not tax-deductible. Invalid resolutions may lead to the trustee or default beneficiaries being taxed. If a company beneficiary’s distribution remains unpaid, Division 7A may apply.
Closely held trusts
If your family trust meets certain conditions, you are required to file a trustee beneficiary statement with the trust tax return.