Companies are a common structure used for businesses to trade from or for individuals to invest through. Companies are separate legal entities from individuals that operate from within companies and therefore there are rules on how individuals can access monies from companies.
The common ways money can be accessed from the company are discussed below.
The most common way to access money from a company is to draw a wage in the capacity as an employee of the company.
The gross wage is generally processed through the company’s accounting software to determine how much of the wage is taxed and reported to the ATO via the company’s Business Activity Statement. The net wage is then paid to the individual from the company’s bank account.
Wages can be paid to working directors and other family members who work in the business.
Where an individual draws a wage from more than 1 employer then it is important to remember that the tax-free threshold should only be claimed once to ensure the individual is taxed appropriately.
Superannuation Guarantee is also required to be paid on behalf of an employee over the age of 18 and is calculated at 10.5% of the gross wage paid (effective from 1 July 2022).
For those employees under the age of 18, Superannuation Guarantee is only required to be paid on an employee’s behalf if they work more than 30 hours a week.
Directors Fees are paid in a similar manner to an employee who draws a wage and are generally paid to those non-working directors or for working directors who perform additional duties for the company.
Tax is required to be deducted from the gross Directors Fee amount and Superannuation Guarantee is also required to be paid on the director’s behalf.
Directors Fees are also able to be accrued in a company so long as they are paid out promptly the following financial year and other conditions are met.
Shareholders of a company can access the profits of the company through the payment of dividends.
Shareholders can also be employees of the company and therefore could access funds from the company in the capacity as an employee and as a shareholder.
A dividend can be paid as franked or unfranked and this is dependent on the amount of franking credits available at the time of the dividend being declared.
Where a company has sufficient franking credits available to fully frank a dividend then it ought to reduce how much tax, if any, is paid by the shareholder.
Alternatively, if a company has insufficient franking credits available then the dividend may only be partly franked or 100% unfranked (which is where there are no tax credits available) and this ought to increase how much tax the shareholder will pay on the dividend they receive.
Franking credits become available for a company where it has paid income tax, income tax instalments or received dividends from another company.
This is not considered a commercial way to access money from a company and is therefore not recommended however under special circumstances, and if structured correctly, this can be another way money can be accessed from a company.
Where a shareholder, or an associate of a shareholder (such as a family member), would like to access money from the company but not as a wage, directors fee or dividend then a loan agreement would need to be entered into between the company and the shareholder which outlines the way in which the loan is to be repaid.
Interest is also required to be charged on the loan balance, at the ATO Benchmark Rate (4.77% for the 2023 Financial Year) until the loan is repaid. The interest charged is assessable income to the company however the shareholder is not able to claim a tax deduction for the interest paid.
Failure to have a loan agreement in place could lead to the amount withdrawn as being a deemed dividend which would mean it would be required to be declared in the shareholder’s tax return as an unfranked dividend which ought to result in significant tax consequences.
To discuss the most appropriate way to pay yourself and others from your company, please contact one of our specialists at Waterford Accountants.