Can you borrow money from your own company?
Yes, but be careful the ATO doesn’t tax you on it. Unwritten loans are taxed as dividends by the ATO. But there is a way to avoid this sneaky deeming provision. Read on.
Those of you fortunate enough to own your own company may have discovered they can be a handy source of funds to tide you over when money is tight. Being a director allows you to take money whenever you want to. Many people do this with the intention that they will pay it back. But will it be considered a loan by the ATO come tax time. The answer is most likely ‘no’.
Loans to Shareholders are covered by Division 7A of the Income Tax Assessment Act 1936. The loans need to at ‘arm’s length’. If not, the ATO deems them to be dividends, and taxes them accordingly – even if you pay them back! So how to ensure your borrowings are considered ‘arm’s length’ by the ATO?
Not surprisingly, the ATO has put out a complicated ruling, stipulating all its requirements. They are many and detailed. Fortunately, we have created a loan agreement that satisfies all the ATO requirements so that you can rest assured your borrowings will continue to be recognised as such and not ‘deemed’ to be taxable by the ATO. We call it the Division 7A loan agreement.
We have also created a Practice Guide which explains the law and refers to the relevant ATO rulings. It lists the requirements so that you can double check your document and make sure it satisfies all the requirements.