An area where we see a lot of trade business owners get into hot water, is when it comes to mixing personal life with company loans.
This is where the business owner takes out a loan from their own business to use privately, rather than pay themselves a salary or take profit distributions
And typically, they do this because it sounds like an ingenious way to ‘pay yourself’ without having to pay tax on it, only a small amount of interest year on year…
But unfortunately, the ATO has been around a long time (a lot longer than you and us!) …
And it’s for this very reason why they introduced Division 7A as part of the Income Tax Assessment Act.
Division 7A was put in place to stop business owners (like you) taking money out of your business to live off, tax-free.
Because if you’re living tax free, then the government doesn’t make any money off you (and the government loves their money!).
So, if you personally take out a loan from your company, the ATO automatically registers that as a dividend, NOT a typical loan.
That means, the ATO sees that loan as assessable income (aka, it’s taxable!), until you can prove that it isn’t… which is a lot harder than it sounds!
So, to put simply… the ATO closed this tax loophole years ago.
And that means you WILL have to pay tax on the loan!
Not to mention that you’ve still got to pay interest on top of that AND the fact that these loans are unfranked (i.e. the ATO can double dip on dividends taken from company profits!).
Golden Rule:
Don’t try to live off company loans to avoid tax… you’ll get burnt!
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Disclaimer: The contents within this post is general advice only. We do not know the specifics of your exact situation, nor your specific circumstances, and we encourage that you seek professional advice. We will not be held liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided.
