As a sole trader or partnership, the tilt is yours. As a company, it it isn’t. It belongs to the company, not you. So since it isn’t yours, how do you still take cash out of your company?
How To Take Cash Out of Your Company
As a company, when you take cash out of your company, what you take comes with tax attached. How much depends on how you do it.
Sole Trader and Partnership
As a sole trader or partnership, your business and you are one. Your business is not a separate legal entity. You are the legal entity. So your business cash is your cash. Take what you think is right.
How much you take doesn’t affect your tax position. You already paid tax on the business profits at your marginal tax rate.
And it doesn’t affect your creditors, since they have your personal assets as backup. You are personally liable for any business debt. As a partner you are severally liable as well, meaning you are liable for all debt, not just your portion.
So take as much cash as you think is right. And leave the rest.
But all this changes when you set up shop as a company. Now you and your business are no longer one, but two. You are one legal entity. And your company is another. And the company’s cash is no longer your cash.
So how do you take money out of your company? There are 5 ways and only those 5 ways, no other.
1 – Wages
The company pays you a wage and withholds PAYG withholding, which you receive back as a tax offset when you do your individual tax return.
Wages are included in your taxable income and you pay tax on these.
2 – Dividends
The company declares and pays you a dividend, hopefully with franking credits attached. Franking credits result in a refundable tax offset and hence are like cash. They are a refund of the tax the company already paid.
Dividends are included in your taxable income and you pay tax on these.
3 – Shareholder Loan
You just take money out of the company and book it against shareholder or director loan. Or you pay private expenses from your company’s bank account. Nobody says that you can’t do that. You can.
But the crux is that unless you pay this back by the time your tax return is due, this loan will be treated as a dividend. So it gets included in your taxable income and you pay tax on it. Unless….you make it a Div 7A loan.
4 – Div 7A Loan
This is a common way to take money out of a company – for up to 7 or 15 years – without treating it as a wage or dividend. You need a formal loan agreement and minimum yearly repayments of interest and principal.
But a Div 7A loan is only a temporary solution. In the end you have to pay it all back and then your money is back in the company, looking for a new way out.
5 – Capital Distribution
Amounts sitting in your capital reserve, for example pre-CGT capital gains, are distributed as capital upon liquidation of your company. This capital distribution will then attract the 50% CGT discount as well as possibly small business CGT concessions, hence significantly reducing the tax you pay on the cash you receive.
So that’s all you have. Those 5 ways. And each will come with a very different tax treatment. Does all this make sense? Just give me a call, if you get stuck.
Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.
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