Consider the tax consequences before borrowing from your company
A company is a separate legal entity, which means it has the ability to legally own assets. As a shareholder or associate of the company, if you make use of these assets by taking money out of the company’s bank account (not as salary or wages), making use of the company premises, or company car, for private purposes, you will need to account for those actions, and you could potentially be personally taxed.
The bottom line is, don’t take any significant amount of money or use assets from your company without seeking professional advice, as the rules around private company loans can be complex.
A loan is considered to have been made to a shareholder or their associate when:
- it’s paid by a private company,
- a debt has been forgiven,
- a shareholder or an associate uses a company asset, or
- an asset of the company is transferred to a shareholder or an associate.
Income tax law can potentially deem any of the above as an unfranked dividend. This means the loan amount will be assessable income to the shareholder/associate and is required to be declared in their income tax return, unless an exemption applies.
Also, since there is no franking credit attached to an unfranked dividend, the shareholder/associate does not receive an income tax credit on their tax assessment.
To avoid the loan being deemed a dividend, you need to enter into a loan agreement with the company. This agreement needs to include an interest rate (which is to be equal to or exceed the benchmark interest rate), and repayments of the principal over a specified term. The specified term can be either 25 years (if fully secured by a mortgage over real property) or seven years for any other loan.
If you have undertaken any of these actions during the 2015-16 financial year, but wish to minimise the risk of the loan being deemed a dividend, you may choose (before lodging your 2016 income tax return) to repay the loan, declare a dividend, or enter into a suitable loan agreement.
For more information on this or any other business taxation issue, contact the SBDC on 13 12 49.