Launching a business requires not only a significant amount of time but also a substantial financial investment, which is usually funded with after-tax dollars. As such, it’s only natural for entrepreneurs to expect some form of compensation from the company once it’s successful. Business owners often explore various avenues such as salary, dividends, cash advances, and company-paid personal expenses. But remember, once invested, the cash becomes the company’s asset.
Let’s delve into how money moves in and out of a company, and the challenges that business owners face.
Reclaiming Money Loaned to Your Business
If you’ve provided a loan to your business, you can reclaim this money as a loan repayment. Although the loan repayment is not tax-deductible for the company, any interest payments made to you are, provided the loan was used for business purposes and interest was charged.
On the flip side, loan principal repayments from the company are not taxed as income, but any interest you earn must be declared in your tax return. Ensure all loans, terms, and repayments are documented.
Profiting through Dividends
Dividends essentially are the company’s profits distributed to its shareholders. If the company has paid income tax and thus has franking credits, dividends can be franked, allowing shareholders to offset their personal tax liability.
Private companies must provide a distribution statement to shareholders within four months of the fiscal year-end. If the company has shareholders who are discretionary trusts, additional issues, such as trust income, family trust elections, and distribution entitlements, need to be addressed.
Returning Share Capital
If a company has a sizeable share capital balance, there could be potential for a return of share capital to shareholders, subject to the company constitution and certain corporate law considerations.
From a tax perspective, a return of share capital generally reduces the cost base of the shares for Capital Gains Tax (CGT) purposes, potentially leading to a larger capital gain in the event of a future sale, though it might not trigger an immediate tax liability. However, be aware of the tax system’s integrity rules, particularly if the company has retained profits.
Shareholder Loans and Using Company Money: Watch out for Division 7A
Tax law in Australia has provisions (known as Division 7A) to prevent business owners from accessing funds in a way that bypasses income tax. This tricky piece of legislation ensures payments, loans, or forgiven debts are treated as dividends for tax purposes unless a loan agreement, meeting strict requirements, is in place.
To avoid deemed dividends, make sure that loans are fully repaid or placed under a complying loan agreement before the company’s tax return is due. A complying loan agreement necessitates minimum annual repayments over a set period and carries a minimum benchmark interest rate.
Tax on Superannuation Balances Exceeding $3m
The government is moving swiftly to impose a 30% tax on future superannuation fund earnings for members whose total superannuation balance exceeds $3m, effective from 1 July 2025. The additional 15% tax will apply to ‘unrealised gains’, creating a tax liability if the asset value increases.
Currently, fund income is taxed at 15%, or 10% for capital assets held by the fund for more than 12 months. With the proposed legislation, businesses could end up paying tax on gains in value without having the cash from a sale to cover the tax payment.
