As a small business owner, director, or shareholder, it’s crucial to understand the tax implications of using your company’s money and assets.
This blog post will guide you through the key points to consider when managing your business finances and personal transactions.
Salary, wages, and directors’ fees
If you’re an employee, director, or shareholder of your company, any salary, wages, or directors’ fees you receive must be included in your individual tax return. Your company can generally claim these payments as deductions, provided it complies with Pay As You Go (PAYG) withholding and reporting obligations.
Key responsibilities for your business:
- Register for PAYG withholding
- Report payment information using Single Touch Payroll (STP)
- Pay withheld amounts to the ATO and make compulsory superannuation contributions
Fringe benefits
Fringe Benefits Tax (FBT) applies when your company provides certain benefits to employees, directors, or their associates. This could include payment of private expenses or personal use of company assets.
Important points:
- Your company may be able to claim deductions for providing fringe benefits
- An FBT return must be lodged, and any applicable FBT paid
- Keep detailed records of fringe benefits provided
Dividends and trust distributions
For companies, profits can be distributed as dividends to shareholders. These must be reported in your individual tax return, including any franking credits.
For trusts, the trustee may make beneficiaries entitled to a share of trust income. This should be documented in the trustee resolution and included in the trust tax return.
Lending money or assets
When a private company lends money or assets to shareholders or their associates, it’s essential to be aware of Division 7A rules to avoid deemed dividends.
To avoid Division 7A implications:
- Repay loans in full or put them on complying terms before the company tax return is due
- Ensure loan agreements meet specific criteria (e.g., interest rates, maximum terms)
- Make minimum yearly repayments
For trusts lending money or assets to beneficiaries:
- Keep accurate records of loans
- Ensure loans are on commercial terms
- Be aware of potential integrity rules that may apply
Read more: Navigating shareholder loans
What happens if you don’t report the private use of business assets
Failing to report the private use of business assets can result in several penalties imposed by the Australian Taxation Office (ATO). Here are the key consequences:
- Financial penalties:
The ATO can impose administrative penalties for failing to take reasonable care, making false or misleading statements, or taking a position that is not reasonably arguable. These penalties can range from 25% to 75% of the tax shortfall amount, depending on the severity of the non-compliance. - Interest charges:
In addition to penalties, the ATO may apply the General Interest Charge (GIC) on any unpaid tax amounts resulting from unreported private use of business assets. This interest accrues daily and compounds. - Audit and increased scrutiny:
Failure to report private use of business assets can trigger an ATO audit. This often leads to increased scrutiny of your business affairs, potentially extending beyond the initial issue. - Amended assessments:
The ATO can issue amended tax assessments for previous years if they discover unreported private use of business assets. This can result in additional tax liabilities, penalties, and interest charges for multiple years. - Division 7A consequences:
For companies, unreported private use of business assets by shareholders or their associates may be treated as deemed dividends under Division 7A. These dividends are generally unfranked, meaning the full amount is taxable without the benefit of franking credits. - Fringe benefits tax (FBT) liability:
If the private use relates to employees or directors, the business may face FBT liabilities, including penalties for non-lodgment or under-reporting of FBT returns. - Loss of deductions:
The ATO may disallow claimed deductions related to the assets used privately, potentially increasing taxable income and tax payable. - Prosecution for serious cases:
In extreme cases of deliberate non-compliance or fraud, the ATO can pursue criminal prosecution, which may result in fines or imprisonment.
Best practices
To maintain transparency and avoid unintended tax consequences:
- Set up separate bank accounts for business and personal expenses
- Keep detailed records of all transactions
- Ensure company loans comply with Division 7A
- Report all transactions correctly for tax purposes
Remember, if you make an honest mistake, it’s best to inform the ATO or your registered tax agent as soon as possible.
Reference: ATO
By understanding these tax implications and following best practices, you can effectively manage your business finances while staying compliant with tax regulations.
Always consult with our KMT registered tax professional for personalised advice tailored to your specific situation. Contact KMT advisers now!
About our advisers:
Chrisanthe Lekatis is renowned for her expertise in management accounting, virtual CFO services, and top-tier business advice. She empowers management with tailored strategies for success, streamlining processes to achieve efficient and cost-effective outcomes. Her commitment to building trust and lasting relationships goes beyond professional excellence; it’s a personal ethos. By actively listening and understanding her clients’ businesses and goals, Chrisanthe thrives on collaborative efforts to navigate challenges and collectively achieve their aspirations. Please do not hesitate to reach out if you need assistance.
Michael Fox has been dedicated to the success of his clients, devising comprehensive wealth strategies for both personal and business growth for over 4 decades. With extensive expertise in business governance and family business succession, Michael specialises in empowering emerging businesses and family enterprises by fostering renewal, enhancing value and smooth transitions to the next generation. Please do not hesitate to reach out if you need assistance.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from a qualified accountant at KMT Partners. Information is current at the date of issue and may change.
