Article by Eamonn Lanagan
as featured in the Farm Weekly issue 20 September 2022
The use of a company, often as the beneficiary of a trust or as a trading entity is a great way to reduce tax payableto allow reinvestment in the farm business. Companies which are involved in an active business and the whole group has under $50m of turnover are taxed at a flat rate of 25%, which is considerably lower than the top personal tax rates of 47% (including the Medicare Levy).
When a distribution is made to a company from a trust, often this is done solely in the financial statements, allowing the trust to retain the funds for working capital. Where the company is a trading company, often shareholders or their associates will take money from the company to meet their personal needs. In both cases, the company is owed money which must be acknowledged and repaid in line with the legislation. As companies are a low tax environment, there is a mountain of legislation and ATO guidance to ensure there is no misuse of the company’s money.
The three regular methods of dealing with the amount owing are:
- Making the amount owing a complying loan (Div 7A loan) and making repayments in the form of franked dividends.
- Purchasing assets, such as farm machinery, in the name of the company using funds from the trading trust or borrowing entity.
- Transfer of cash to the company. (Unlikely to be economical if the business has bank borrowings.)
If the amount owed is not correctly dealt with by the time the tax return of the company is lodged or due to be lodged, the outstanding amount becomes a “deemed dividend”, making it fully taxable to the shareholders in that year. No company tax credits (called franking credits) are attached to the deemed dividend. This can lead to significant amounts of additional tax payable.
Unfortunately, we often review a new client’s financial statements and pick up substantial amounts owing. The farm business entity has enjoyed the lower tax rate but incorrectly dealt with the amounts owing.
As this is a complex area of legislation, there is the ability for a business’ new accountant to engage the ATO and have these past mistakes rectified without penalty, or in some cases totally disregarded.
If you have a company in your structure, it is highly recommended you contact your local Byfields Business Adviser to review your company’s financial statements.
To discuss this article further, we encourage you to contact Eamonn Lanagan at eamonnl@byfields.com.au or your Byfields accountant.
Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice.