Many contractors choose to operate through a Pty Ltd company because it is the best structure for them.
Because a Pty Ltd Company is a separate legal entity, all money and assets belong to the company rather than the shareholders (owners). This means that you cannot simply withdraw funds from a limited company bank account and use them for personal purposes. There are tax implications that may force you to pay the highest marginal tax rate (of 47 percent including the Medicare levy). Depending on the situation, there are a few ways to properly take money out of the company.
AccoTech is of the opinion that best tax planning should not be confined to the closing of the books; rather, it should be utilised throughout the long period in order to achieve the overall objectives of tax planning. Our tax experts are here to assist you in formulating strategies for a brighter future and carrying those strategies out in an efficient manner so that they can become a reality.
There are four common ways for a director of a Pty Ltd Company to withdraw money from the company. Each method has different tax implications, so you should consult your accountant or Box Advisory Services before withdrawing money from the company. Please keep in mind that the following information is only a guide and should not be used as legal or tax advice. These are the four methods:
1. Directors' salaries, wages, or fees
2. Payment of dividends
3. Loans from directors
4. Director expense reimbursement
Directors' salaries, wages, or fees
The most basic and common method of taking money out of a limited company is to draw a salary, wage, or director's fee.
Because the company is its own separate legal entity, it is required to employ you as an employee when it uses your skills and labour. As a result, the Director is an employee of the company and is entitled to a salary, wages, or directors fee.
This means that the company will become the employer, withholding tax and paying the director's mandatory superannuation. The payments will be tax-deductible for the company, and they will be included in the director's income tax return for the fiscal year, implying that the director will pay the tax on the salary, wages, and fees, rather than the company.
Director Expense Reimbursement
Another way to take money out of a limited company is through director expense reimbursement.
If the director paid for expenses on behalf of the company while solely running the business, the company can repay these amounts without incurring any additional tax.
These expenses cannot be for personal use and may include travel, phone, internet, training, and other business expenses.
Payment of dividends
If you run a contractor business, the director will almost certainly be the company's shareholder.
Aside from their salary, wages, and expenses, directors can also pay themselves dividends, which can be used to fund a limited company.
The dividend may be fully franked (the company has already paid tax on the retained profit) or unfranked (no tax has been paid on the retained profit).
Dividends can be paid at the end of the fiscal year or at various points throughout the year.
During a board meeting, the directors must declare the dividends and the payment date, and shareholders must be given a dividend certificate. The dividend income must be reported on their income tax return for that fiscal year.
Dividends have the significant advantage of not being subject to superannuation, payroll tax, or worker's compensation. Your accountant can help you calculate the dividend because it is quite complex and requires some administrative work to prepare.
Directors make a loan
Another way to get money out of a limited company is through a directors' loan.
The directors' loan, as the name implies, is a loan from the company to the director. The director has the option of borrowing money from the company or vice versa.
The director frequently borrows money from the company. Because this is a loan, there is no need to withhold any tax from the payment.
Other consequences of this method depend 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 money at the end of the fiscal year, withdrawing the money has no complicated consequences.
However, if the director owes money to the company, there are consequences.
The ATO requires a directors loan agreement between the director and the company because the company is a separate legal entity.
The directors' loan agreement must specify the minimum repayments, loan length, and interest rate. It must also comply with Division 7a loan tax laws. This method is quite complex, but it comes in handy in certain situations.
In addition, we have an Accounting website with the domain name Accotech, which provides accounting services in the country of Pakistan. Taxation, bookkeeping, payroll, VAT, and other accounting services are available in the Website.
