Taking Money from Your Trading Company

Rede Accountants Gold Coast, Brisbane & Toowoomba

Scenario: You’ve worked hard and built up surplus money in your company bank account. Congratulations!
You think to yourself, the money is mine to do what I like, so why not just draw it out and pay it off the home mortgage? It won’t affect anyone else. All my suppliers have been paid on time and the bank is up to date”
WRONG!!! THE TAX OFFICE IS LURKING.
Some bad news, technically the money belongs to the company. It’s considered a company asset and a company is a separate legal structure to you.
Your company shares may well be owned and controlled by you but the company assets and property are NOT yours, by law.
If you draw the money out it may well be treated as a loan from the company. Meaning you owe the money back to the company.
If your company has a history of making profits, chances are that taking this money out of the company triggers Division 7A of The Tax Act.
That means it could potentially be taxed at 47 cents on the dollar (on top of normal company tax of 27.5 cents). That’s expensive. The logic from a taxation perspective is that you should not draw funds from your company unless you pay personal tax on these drawings.
If there is no history of making profits, its unlikely there would be surplus funds available to draw.
Most of the time when you take monies from your company it is paid as wages or as company dividends.
These are different scenarios to borrowing money from the company and don’t incur the Tax Act wrath as they will be declared as income on your personal tax return.

WHAT SHOULD YOU DO?

The golden rule is that if you want to take money out of your company and it’s not wages or declared franked dividends, speak to your accountant first, before the event. They could save you a lot of pain. To talk to our team about Taking Money from Your Trading Company contact us here.