One of the common mistakes that business coaches see start ups make is where newly-minted entrepreneurs fail to clearly distinguish between the business’s money and assets and their own private assets.
But the fact is that doing so can lead budding business moguls into perhaps unintended negative tax consequences, and is a trap prevalent enough to see the ATO issue a fact sheet on the problem on a regular basis (see link below).
From the outset, the ATO emphasises that a company is a separate legal entity from the person behind the business. Any assets of the business, and money the business earns, do not belong to a director or shareholder of the company — they belong to the legal entity that is the business. If a director or shareholder takes money out of the business or uses its money or assets for themselves (or their family), these need to be reported to the ATO and appropriate records kept.
It’s not that using the money and assets of a business is completely off limits — it’s just that these actions are required to be completed through bone fide means. Using the assets of a company for private purposes can be done through:
- salary, wages, director fees
- repayments of a loan previously made to the company
- a fringe benefit, such as an employee using a company car
- dividends (a formal distribution of the profits)
- a loan from the company.
There are different reporting and record-keeping requirements for each of these circumstances.
The trap for the unwary is that accessing company money or assets through means that are not “ATO-approved” leaves the individual in peril of being deemed to have received an unfranked Division 7A dividend. The individual will have to declare this dividend as income in their tax return, with perhaps tax being owed on the unfranked amount, and the company will not be able to claim a tax deduction for the dividend.
Note that the general scenario also applies to any individual or entity that is an “associate” of a shareholder, which may include a relative, partner, spouse, or another entity controlled by the shareholder (such as an associated company or trust), and someone who has previously been a shareholder (or an associate of such a shareholder), such as a former partner or spouse.
See the ATO’s fact sheet: Using your company’s money or assets