A personal bill arrives while the company account has plenty of cash. You pay it from there and intend to sort it out later. One transaction becomes several, and by year end the accounts show a balance described as a director’s loan.
That balance deserves attention. Owning the company does not make its funds interchangeable with your personal money. The way cash leaves the company can affect your tax position, the company’s records and its ability to meet commitments.
Put a reason behind every transfer
Money paid to an owner might be wages, a dividend, repayment of money previously lent to the company, reimbursement of a genuine business cost, or a loan. These are different arrangements with different requirements.
The description in the bank transfer is not enough to establish the treatment. The underlying facts and records need to agree. If the company already owes you money, confirm the balance and its origin before assuming a new withdrawal is a loan repayment.
ASIC has reminded directors to manage company money and assets in the company’s interests. A tax treatment does not remove the need to consider whether taking the cash is appropriate for the business.
What Division 7A is trying to prevent
Division 7A can treat certain payments, loans and forgiven debts provided by a private company to shareholders or their associates as unfranked dividends. It is designed to address access to company profits through arrangements that would otherwise avoid dividend treatment.
The rules contain exceptions and limitations, including rules concerning distributable surplus. They are not a reason to assume every transfer automatically becomes a dividend. They are a reason to assess the arrangement before deciding it is harmless. The ATO’s Division 7A overview explains the starting point.
An associate can include people or entities connected with a shareholder. Moving money through another account or paying a family expense directly does not necessarily avoid the issue. Tell your accountant about the complete transaction, including who received the benefit.
The deadline is connected to lodgment
A loan may need to be repaid or placed on a complying arrangement before the company’s lodgment day for the relevant year. This is generally the earlier of the actual lodgment date and the due date. Lodging the return early can therefore matter.
A complying loan has requirements around a written agreement, interest and the permitted term. It also creates ongoing repayment obligations. The ATO’s private company loan guidance sets out those conditions. This is more than asking the bookkeeper to rename an account.
Illustrative example: A director has used $24,000 of company funds for private costs. Before lodging the company’s return, the accountant reconciles the balance and checks its treatment. If a complying loan is appropriate, the director needs to understand the agreement, the required repayments and where those repayments will come from. Signing paperwork without a cash plan leaves the next year’s problem waiting.
A repayment needs to be real
Repaying money briefly and then borrowing it again can be caught by rules that disregard certain repayments. Do not assume that moving funds around at year end fixes the balance. The ATO addresses this in its Division 7A myths guidance.
The practical approach is to agree how owner remuneration and withdrawals will work through the year. A regular arrangement that the business can afford is easier to monitor than a collection of ad hoc transfers and private card payments.
If a dividend is proposed as part of the solution, consider the company’s capacity to pay it, franking and the recipient’s tax consequences. If wages are proposed, consider payroll obligations. The objective is a supportable arrangement, not a journal entry chosen only because it makes one account disappear.
Give the loan account a monthly check
Ask for a report showing amounts advanced, repayments, private costs paid by the company and the closing balance. Investigate unfamiliar entries while the receipts and circumstances are still available. Keep signed agreements and repayment schedules in the company’s records.
Set reminders well before required repayment dates, and include the payments in your personal and business cash forecasts. If the balance is growing despite regular repayments, find out why. It may be signalling that household drawings are running ahead of sustainable business cash.
Where earlier years may have been handled incorrectly, get advice promptly. The ATO outlines risk management and corrective action; available relief depends on the circumstances. A conversation before the return is lodged gives you more room to understand the position and choose a proper course of action.
Target Advisory 