Taking money out of a limited company for personal use
Many contractors choose to operate out of a Pty Ltd company as it is the most suitable structure for them.
A Pty Ltd Company is a separate legal entity and thus, all the money and assets belong to the company as opposed to the shareholders (owners). This means you cannot simply be taking money out of a limited company bank account and use it for personal use. There are tax implications which may result in you paying the highest marginal tax rate (of 47% including the Medicare levy). There are a few methods of taking money out of the company correctly depending on the situation.
As a director of a Pty Ltd Company, there are four common ways to withdraw the money from the company. Each method is quite different in terms of tax implications and thus you should consult your accountant or Box Advisory Services before planning to withdraw money from the company. Please note that the following information is just a guide and it should not be relied upon for legal and tax advice. These four methods are:
1. Directors salary, wages or director’s fees
2. Dividend payment
3. Director loans
4. Expense reimbursements for directors
Directors’ salary, wages or director’s fees
Drawing a salary, wage or director’s fee is the most simple and common method of taking money out of a limited company.
As the company is its own separate legal entity when it uses your skills and labour it is required to employ you as an employee. Therefore, the Director is an employee of the company and can receive a salary, wages or directors fee.
This will mean the company will become the employer and withhold tax and pay the director’s compulsory superannuation. The payments will be tax-deductible for the company and the payment will be included in the director’s income tax return for the financial year, meaning the director will be paying the tax on the salary, wages, and fees, not the company.
Expense Reimbursements for Directors
Another way of taking money out of a limited company is through expense reimbursement for directors.
If the director has paid for expenses on behalf of the company in the course of exclusively running the business, then the company is able to repay these amounts without attracting any additional tax.
These expenses must not be for personal use and can include travel, telephone, internet costs, training, and other business expenses. Please refer to our guide to expenses for contractors for more information.
If you run a contractor business, the director will likely be the shareholder of the company.
On top of their salary, wages, and expenses the director can also pay themselves dividends which can formulate a method of taking money out of a limited company.
The dividend can be fully franked (the company has paid tax on the retained profit) or unfranked (no tax has been paid on the retained profit).
The dividends can be paid at the end of the financial year or at different times throughout the year.
The directors must declare the dividends and the payment date during a board meeting and the shareholders must be issued with a dividend certificate. The dividend income must be included in the amount in their income tax return for that financial year.
The great benefit of dividends is that they are not subject to superannuation, payroll tax or worker’s compensation. Your accountant will be able to assist you with calculating the dividend as it is quite complex and takes some administration work to prepare.
The directors’ loan is another method of taking money out of a limited company.
As the name suggests, the directors’ loan is a loan from the company to the director. The director can borrow money from the company or vice versa.
It’s quite common for the director to borrow funds from the company. In this case, there is no need to withhold any tax from the payment as it is a loan.
There are other implications on this method which depends on the length of the directors’ loan and whether the director owes the company or the company owes the director. If the company owes the director at the end of the financial year then there are no complicated implications if the money is withdrawn.
However, there are implications if the director owes money to the company.
Since the company is a separate legal entity the ATO requires a directors loan agreement between the director and the company.
The directors’ loan agreement must detail the minimum repayments, length of the loan and interest rate. It also must satisfy the division 7a loan tax laws. This method is quite complex but very useful in certain situations.
It’s heavily recommended that you speak to your accountant so you can be advised in detail on how it all works. We would not recommend doing this method without consulting with your accountant for advice.
A specialist accountant tailored to consultants, contractors, freelancers, and locums operating out of a company would be able to advise you on how to deal with the situations listed above.
Box Advisory Services has more than 10 years’ experience in dealing with clients operating out of Pty Ltd companies. We are familiar with dealing with the complex accounting and tax system. Let us help you run your business so you can have peace of mind as well as a secure financial position. Feel free to contact us and we will find the right package for you.
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Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your business affairs.