How to take cash out of your company without getting hit with a massive tax bill?
How To Take Cash Out of Your Company
Being a sole trader or partnership, one thing is really simple: taking cash out. No strings attached. Your business bank account is all yours. As a company, it it isn’t.
Sole Trader and Partnership
As a sole trader or partnership, your business and you are one. Your business is not a separate legal entity, but part of you. So your business cash is your cash.
How much you take doesn’t affect your tax position. You already paid tax on the business profits at your marginal tax rate.
Company
But all this changes in a company. Now you and your business are no longer one, but two. You are a legal entity. And your company is another. The company’s cash is no longer your cash.
So how do you take money out of your company? There are 5 ways and just those 5 – there is no other way.
1 – Wages
The company pays you a wage. Any PAYG withholding you receive back as a tax offset when you do your individual tax return.
Wages are included in your assessable income. So you pay tax on any wages you receive.
2 – Dividends
The company declares and pays you a dividend, hopefully with franking credits attached. Franking credits give you 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 assessable income. So you pay tax on any dividends you receive, but with a tax offset for any franking credits.
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 it hitting your individual tax return as income. 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 profits reserve, for example pre-CGT capital gains, are distributed as capital upon liquidation of your company.
Capital distributions receive generous tax concessions (50% CGT discount, small business CGT concessions), so you pay a lot less tax than if you had received this money as wages or dividends.
So that’s all you have. Those 5 ways. Does all this make sense? Just give me a call, if you get stuck.
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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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Last Updated on 06 October 2020
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