Privately Spending Company Money – Why your Bookkeeper is hassling you and what are those DIV 7A loans?
It’s your Company? Then why does your Bookkeeper hound you on spending on personal items from your company accounts. Please read on.
The company that you have set up (your Pty Ltd) is a special structure and the company itself is its own person, its own entity in its own right. So always think of your company as a good friend. This friend makes money (hopefully) it can pay you as an employee and it can loan you money, but as you would a good friend, you would pay this money back. If you don’t pay the money back then your other friend, the Australian Taxation Office, has developed The Division 7A rules.
The Division 7A rules have been implemented to regulate correct tax treatment and set the guidelines for how to prevent the loan or expense being treated as that tax-free distribution. It does not matter why you took the money from the company, i.e. there is no difference if you borrow the money for an income producing venture for example investment in property. The ATO treat the loans the same, i.e. a private use. For example, a $100,000 loan from the company for an investment property, may be treated as a deemed dividend, which is taxed at the personal marginal rate and will result in a tax bill of $30k to the individual.
Current rules indicate the loan needs to be established under commercial terms with maximum loan period of 7 years or 25 years if property is used as security. Repayments to the company will be required and interest is to be paid to the company on a benchmark rate as determined by the tax office.
It is the Bookkeeper’s role to ensure private expenses are kept separate to company expenses. A simple solution is to repay the debit loans taken from a company prior to the end of the year.
Under the tax law of Division 7A any loans to shareholders may be automatically treated as an unfranked dividend payment. (i.e. no deduction to the company and assessable income to the shareholder with no tax credit)
So, my summary, if your good friend i.e. your company can afford to pay you as an employee then by all means draw wages from your entity. If you need to borrow more money from your friend then ensure you can pay it back, and always, always, keep records.