If you own your own business it can be easy to let the lines blur between private and business money – but don’t fall into the trap!
Private and business funds are treated differently for tax purposes and it’s important to keep them distinct so you can ensure you don’t pay too much tax.
There are a few different ways that a director or shareholder’s private money can become business money or vice versa – we’re going to lay out how this happens and the obligations on both sides of the transaction.
Salary and wages with business money
For many business owners, the business pays them a salary, a wage or a directors fee, which then becomes their private funds separate from the company.
This is much the same as paying any other employee – you’ll need to include it on your annual individual tax return and the business will need to withhold tax and pay superannuation.
Using business assets for private purposes.
When the employee/director receives benefits from the company or trust they work for, fringe benefit tax may apply. This might be applicable to the payment of private expenses or using business assets, such as a company car, for private purposes.
The business may be required to pay fringe benefit tax on the benefit provided.
Dividends paid by the company to you or the shareholder
In cases where the director owns shares in the company, they may also earn income through dividends paid to shareholders.
The director will need to report the dividend as income in their tax return.
Trust distributions to you as a beneficiary
Where the business is operated through a trust, you may be entitled to a share of the trust income, as a beneficiary.
The trust return will include details of this distribution and this income will be declared in your personal return.
Loans from the company or trust to the individual
If you withdraw money from the company or trust that is not business related, you are borrowing money, creating a loan, from the company or trust. Special care must be taken to avoid the total of this loan being considered income. In order to do this, the loan will either need to be repaid within 12 months or a loan agreement created with a repayment schedule and appropriate interest rate agreed upon. The individual who borrows the funds must make minimum annual repayments.
There are more things to consider than first appear when managing your business and personal funds. It’s important to manage things correctly to ensure your compliance with the relevant tax considerations. This is just one of the many areas your trusted Gold Coast accountants can assist with.
