Getting the year end right
During the year, company directors, shareholders or their associates from time to time may withdraw company funds out of the company bank account. Withdrawals may come from in the form of company payments of personal expenses, bulk withdrawals to pay off personal debts (such as putting against home loans) or assisting family members with personal expenses (such as education or secondary school).
Mostly these withdrawals will go against the owner or director (or associated person’s) drawings account during the year and can be the unintended result of various events that occur when completing the end of year accounts (such as accounting for private portions of company cars). These amounts if still out of the company by 30 June of that year will result in that person owing the company money and having a balance outstanding in the company’s accounts at 30 June of that year.
Outstanding amounts can have significantly negative consequences if not dealt with appropriately and can be impacted by “Division 7A”. Division 7A dictates that certain amounts deemed to be owed to the company (including drawings as detailed above) will be treated as unfranked dividends to that person in that income year if not dealt with appropriately. An unfranked dividend has no tax benefits such as franking credits and can result in you potentially paying more income tax than expected.
There are several ways to deal with franking credits, summarised as follows:
- Pay the loan in full by 30 June – ensuring that it does not show on the company balance sheet.
- Declare a dividend by 30 June – appropriate on certain occasions for small amounts to ensure you take advantage of any franking credits – appropriate in certain circumstances.
- Pay the loan in full by the earlier to the company tax return lodgment or tax return due date – loan will appear on balance sheet but you may not be impacted by Division 7A (provided you get the timing right).
- Convert the Loan into a complying loan under Division 7A by the earlier of lodgment or due date, charge interest and make the minimum repayment by the end of the subsequent year – appropriate for larger amounts or loan amounts drawn in previous years.
Where the loan relates to an amount taken out in a previous year (and an agreement was made on time), the minimum repayment will need to be made either via a complying dividend or cash repayment and fully documented by 30 June as well.
Miscalculating the amount payable or minimum loan repayment (for previous year loans), not conducting set off by fully documenting the dividend by 30 June (i.e. leaving to the year after) or repaying the loan in an appropriate manner on time may result in negative tax consequences and stress at tax time, trying to find additional funds to cover unexpected income tax. It is important for this reason to ensure that you contact your Simaco Partners Manager to review your circumstances and make sure you are prepared for year end.
The above is intended to be a general review of a complex area and does not cover issues such as amalgamated loans and impacted trust transactions, nor does it consider your personal or specific circumstances. If you are concerned about whether you may be impacted by Division 7A, please contact this office on (02) 9707 4470 and talk to one of our managers today. You will likely need to have up to date info on your financial year-to-date situation to allow us to have a clear picture and assist you. We look forward to hearing from you and assisting you in your tax needs.