In this Tax Tip Tuesday, we look at a question that business owners will face at some time with their business. Can I borrow money from my business?
This is part of our three part series on how do I take money out of my company?
The final way to take money out of your company is as a loan. This essentially means you are being loaned money from the company. The thing to remember here though is that your loan is a ‘balance’ and takes into account both money you have taken out of the company as well as money you have put in.
What we generally find with our business clients is that to start their business, they normally put in a fair bit of their own money. Let’s say you put in $20,000 to start your business. Using this scenario, you can take out up to $20,000 tax free before triggering any loan amount owing by you to the company.
If you want to take money out of the company and you now owe the company money, you need to be careful as there are serious tax consequences around this. If you don’t have a formal loan agreement in place, you may have to pay tax on that amount not only through the company but in your personal tax return as well. If you do have a formal loan agreement in place, you may be required to pay interest to the company. This is what is known in accounting language as “Division 7A loan repayments”. Generally speaking, we try to avoid Division 7A loans as the ATO sees it as a tax deferral mechanism. We try to avoid these situations by doing one of the first two options discussed above. As well as charging interest, a minimum repayment needs to be paid every year so that the loan is repaid within 7 years.
This Tax Tips Tuesday is brought to you with love by Nudge Accounting. You can read other Tax Tips here.