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If you are a shareholder in a private company, please take note than you cannot draw money out of the company without it being deemed as a dividend or an interest bearing loan, unless you have paid it back by the end of the financial year or the company owed you money.xml:namespace prefix = o />
Division 7A ensures that private companies cannot make tax free distributions of profits to shareholders or shareholders’ associates in the form of payments, loans and debts forgiven in an income year. However, where a loan is under a qualifying written agreement that satisfies certain minimum interest rates and maximum term criteria, the private company is not taken to have paid a dividend in the year the loan is made. If the entity then fails to make the minimum yearly repayment in a subsequent year, the private company is taken to have paid a dividend to the entity in the income year in which the minimum yearly repayment is not made.
If the company has paid income tax in past years that tax can be used as imputation credits on the shareholders dividend. Your dividend will therefore already have up to 30% tax paid on it. Please note that in cases of deemed dividends, the benefit of these imputation credits that would have attached to the dividend are lost forever.
Loans from a company to an associated family trust are also classed as tax free distributions where those funds are on-lent by the family trust to a beneficiary who is also a shareholder of that company. Therefore, where such loans exist it is important that the beneficiary’s loan account in the books of the trust is in credit balance at 30 June.
If you are a shareholder in a company, please contact us before you draw out money for private use and we will let you know what the taxation consequences will be.
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