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This information will help you understand how money taken out of your business, or using business assets for private purposes, must be recorded and reported for tax purposes.
It applies if you are an individual who:
The most common ways you may take or use money or assets from a company or trust are as:
There are reporting and record-keeping requirements for each of these types of transactions.
You may need to report and must maintain appropriate records that explain transactions of which you have:
The ATO view on minimum record-keeping standards is provided in Taxation Ruling TR 96/7.
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You can be an employee and a shareholder or director of the company that operates your business. You can also be an employee and a beneficiary of the trust that operates your business.
You must include any salary, wages or directors' fees you receive from your business as assessable income in your individual tax return.
The company or trust that operates your business can generally claim a deduction for any salaries, wages or director's fees paid.
Your business must:
Fringe benefits tax (FBT) applies when employees or directors of a company or their associates receive certain benefits from the company or trust. This could be a payment or reimbursement of private expenses or being allowed to use the business assets for private purposes such as the business's car.
Your business:
There are various exemptions from FBT that may apply, for example, the small business car parking exemption.
The FBT liability for your business may be reduced if you (as an employee) make a contribution towards the cost of the fringe benefit.
You don’t need to report the value of fringe benefits that you (or your associate) receive, in your tax return, unless they are included as reportable fringe benefits on your payment summary or income statement.
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If your business is run through a company, the company can distribute its profits to its shareholders, which can include you.
This distribution of profits is known as a dividend.
If the company has franking credits, it may be allowed to frank the dividend by allocating a franking credit to the distribution. A franking credit represents income tax paid by the company on its profit and can be used by the shareholder to offset their income tax liability.
A company must issue a distribution statement at the end of each income year to each shareholder who receives a dividend. It must show the amount of the franking credit on the dividends paid and the extent to which they were franked. The company may also need to lodge a franking account tax return in certain circumstances.
Any dividends that you receive and franking credits on them must be reported in your tax return as assessable income.
The company cannot claim a deduction for dividends paid as these are not a business expense, but rather a distribution of company profit.
If your business is operated through a trust, the trustee may make the beneficiaries presently entitled to a share of trust income by the end of the financial year according to the terms of the trust deed.
By the end of a financial year, the trustee should advise and document in the trustee resolution:
If the trustee resolution is not made according to the terms of the trust deed, it may be ineffective and, instead, other beneficiaries (called default beneficiaries) or the trustee may be assessed on the relevant share of the trust's net (taxable) income. Where a trustee is assessed, it may be at the highest marginal tax rate.
Details of the trust distribution should be included in the statement of distribution which is part of the trust return lodged for each financial year.
The trust cannot claim a deduction for distributions paid as it is not a business expense, but rather a distribution of trust income.
If the beneficiary of a trust is a company, and the trust does not pay the amount the company is presently entitled to, Division 7A of the Income Tax Assessment Act 1936 can apply.
If you have a trust within your family group, in some circumstances you may need to include a trustee beneficiary statement as part of the trust return lodged.
For further guidance, see closely held trusts.
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A company can make a loan to its shareholders and associates.
When a company lends money or assets to a shareholder, the shareholder may be taken to have received a Division 7A deemed dividend if certain conditions are not met. If this happens, the shareholder will need to report an unfranked dividend in their individual tax return and the company will have to adjust their balance sheet to reduce their retained profits.
To avoid a Division 7A deemed dividend, before the company tax return is due or lodged (whichever comes first), the loan must either:
To put a loan on complying terms, the loan must:
The company must include any interest earned from the loan in its tax return.
You (the shareholder):
If you borrow money from the trust, you will need to keep a record of it. If the loan is on commercial terms, you will need to repay the principal and interest as per the loan agreement. The trust will need to report the interest as assessable income in its tax return.
There may be a situation where someone receives an amount of trust income instead of the beneficiary who is presently entitled to that amount in an arrangement to reduce tax. This can happen where the trustee, instead of paying the trust income to the presently entitled beneficiary, lends that money on interest-free terms to another person.
This is called a reimbursement agreement and section 100A of the Income Tax Assessment Act 1936 may apply. This means that the net income of the trust that would otherwise have been assessed to the beneficiary (or trustee on their behalf) is instead assessed to the trustee at the top marginal tax rate.
If you have lent money to your business, your business will make repayments to you.
Your business cannot claim a deduction for any repayments of principal it makes to you but may be able to claim a deduction for interest it pays to you on the loan. The company or trust should keep records of any loan agreements and documents explaining these payments being made to you.
You do not have to declare the principal repayments, but any interest you receive from your business is assessable income to you and must be included in your individual tax return.
If you take money out of your business or use its assets for private purposes in a way not described above, you or your business may have unintended tax consequences. This may include triggering Division 7A.
To ensure your business transactions are transparent:
If you make an honest mistake when trying to comply with these obligations, you should tell us or your registered tax agent as soon as possible.
ATO
ato.gov.au
The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.