There is always changes and new legislation buried down inside a federal budget. The changes the press don’t see or report. But there is a real change in regard to drawings from a company and it’s dramatic.
So many business owners just draw from their company and they will leave it to their accountant to “fix it up”.
That means a wage that looked reasonable may have been created for the Business Owner to pay personal tax on. However, Business Owners continue to draw money which creates Directors Loans that just keep building up, as the accountant is not sure what to do with this extra money taken.
The legislation and procedures surrounding this have been muddy and unpatrolled by the ATO to say the least. Business owners – many, many professional people have got away with it.
That is – draw money and pay no tax. That simple – and unless there was a solvency issue, where an administrator or liquidator looked at the balance sheet nothing happened.
“Currently we’ve got some really complex rules around unpaid present entitlements where a trust distributes income to a company and that distribution is not paid. So it stays unpaid and there are some very complicated rules that the tax office has covered off in a tax ruling and a PS LA about how to treat them,”
PAY ATTENTION – THAT HAS ALL CHANGED.
Under the changes in the budget (and it’s in the budget as the ATO sees it as a major issue) from 1st July 2019 the debit loan must automatically be a commercial loan (7A) or its income, which means that by then many of our clients will face the issue of having a large commercial loan, that must be paid, or they are going to be really – and I mean really king hit with a personal tax debt.
The measure will ensure that unpaid present entitlement is either required to be repaid to the company over time as a complying loan or subject to tax as a dividend. And the taxman is really watching this time, as accountants now can be just as liable.
In a nutshell, after this date there are going to be some massive tax debts. I mean massive. Let me just say that one more time, there are going to be some massive tax debts.
Of course, the devil is in the detail, but this is going to be more dramatic on many.
So, time to look at your balance sheet.
If you see a loan account that is either positive figure in the debtors or a negative in the creditors list and it used the work like, directors or stakeholder or beneficiary, then unless you plan now you are looking at a massive tax debt.
Here is what to do
- Start a good habit of tax planning with Your Business Angels accountants to make sure you are in the best “tax pick a box”.
- Talk to us, about the journey that can eliminate the debit loan account, so that you have a plan in place before the legislation comes into play (and in this planning you will probably be better off with a better tax plan)
- Review your personal and business budgets.
Your Business Angels accounting teams is well prepared for the change and to help plan with clients. But its up to the business owner to be aware and what to make those changes.
“It’s up to you. What do you want to do?”