It can be temping for founders to run their own expenses through the business they founded, they may think this is their company and as such their assets they are deploying. Unfortunately, this is not the case when it comes to a Proprietary Limited company, where the company exists separate to it’s founder. This raises issues that the founder then has to deal with, which can lead to unintended tax issues, for the company and the individual.
This article will discuss the implications of running personal expenses through a private company, purposely skipping public companies for another time.
To begin, let us define some common structures of business and their features:
Parties
Types of Business
|
Type of Business |
Features |
Tax Treatment |
Name Type |
Shareholder/s |
Risk |
|
|
|
|
|
|
|
|
1. Sole Trader |
Is run by an individual with no special treatment or separation |
Received directly by the individual who is carrying out the services or selling the product and treated as personal income |
Can be a registered business name (Through ASIC) or the name of the “owner” |
None |
100% risk lies with the individual |
|
2. Proprietary Company |
Is considered separate to its founders, directors’ employees etc |
Received by the company itself and depends on how this is disbursed (Dividends or income) |
Is referred to as Proprietary Limited or Pty Ltd |
Can be anyone, for small companies this is generally the director of the entity or family |
100% of risk is with company in most circumstances |
|
3. Partnership |
Where 2 or more individuals or companies agree to conduct business together, generally sharing profit and risk |
Partnerships do not exist separately, instead income is distributed to the individuals or companies forming the partnership |
Either the name of the individuals, companies, or a business name |
None, but partners are deemed under an agreement |
Depending on type of partnership, this is also distributed like income amongst the participants in the partnership |
As mentioned, this articles focus is on the 2nd option, being a company. Being a company carries with it a multitude of additional legal implications for the founder, especially if they become a director.
How do you run expenses through a company?
When we refer to running expenses through the company, this means a director or employee paying for personal expenses (such as that gym membership they will definitely use in the new year) from the company’s assets. This could by using the company credit card to pay for those personal expenses, or using assets of the company for personal use, such as a house owned by the company to host a new year party for mates.
Why is this an issue?
Outside of the potential for this to hurt a company’s performance, it is also using assets that do not belong to that individual, you will recall long ago we discussed how a company is a separate legal entity who has it’s own assets and of course follows, responsibilities.
What does this mean?
If the director or employee (directors being considered employees for the purposes of tax) uses an asset or takes some benefit as a result of using the companies’ assets, this has potential tax implications for both the company and the person using the assets or money.
Most notably, a Fringe Benefit Tax is now payable and Division 7A of the Income Tax Assessment Act 1936 (CTH) may come into play.
WHY?
Fringe Benefit Tax (The companY’s pitfall)
This is a tax payable by the company for providing a benefit to an employee through the company’s assets via a ‘payment’ that is not a wage or dividend. For example, allowing an employee to use a company car, or providing a loan to said employee with no loan agreement and potentially no interest.
This means the company must pay a Fringe Benefit Tax which could be costly depending on the value of the benefit.
Division 7A (The Individual’s pitfall)
If a director or associated person uses assets of a company at no cost or less than market, the ATO may deem the value of the benefit to be an unfranked dividend. Unfranked dividends are where no tax has been paid on the amount in question, meaning the person who received the benefit will be liable to pay tax on the full amount as part of their personal income.
If not a fixed amount/cash amount, the ATO will determine the value of the unfranked dividend with reference to the arm’s length value minus any amounts paid if any has been.
What should you do then?
When running a company, it is always a wise move to ensure that your personal expenses are kept separate to the business. This can be done easily through a company bank account which is easy to set up with assistance from an accountant.
Certain company structures also allow for legal access to the funds of the company, usually through dividends which can have a beneficial tax rate applied versus that of the traditional personal income tax.
This is all to say, when in doubt, contact your legal advisor, they will be able to tell you if your method for obtaining funds from the business is indeed legal and if it will have any unforeseen effects down the road. They can also provide advice on the method and structure that best suits your company and you as an individual.
If you want more information or wish to speak to a lawyer regarding re-restructuring advice please contact Frank Law and Advisory and we can point you in the right direction.
