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Some banks are advising customers with business accounts to transfer excess cash to pay down the business owner's home loan. While it might sound like common sense to use the excess cash in your business, there are significant potential problems for business owners who do this.
Some banks are advising customers with business accounts to transfer excess cash to pay down the business owner's home loan. While it might sound like common sense to use the excess cash in your business, there are significant potential problems for business owners who do this.

Money in your business account is the money of the business, not your personal cash. You can't just take it out and move it around at will, even if it is your business. 

If you run a company, there are a set of tax rules called Division 7A that apply. Division 7A is a particularly tricky piece of tax law designed to prevent business owners accessing funds that have not been taxed at their individual tax rate – only the corporate rate. While these amounts are often debited to the shareholder's loan account in the financial statements, Division 7A ensures that any payments, loans, or forgiven debts are treated as if they were dividends for tax purposes unless there is a valid shareholder loan agreement in place. 

So, if you take money out of your company bank account to pay down your personal home loan, this amount might be treated as a deemed dividend. That is, you need to declare this amount in your personal income tax return and the dividend is not frankable. This means that even though the company might have already paid tax on this amount, you will be taxed on it again without the ability to claim a credit for the tax already paid by the company (basically leading to double taxation). 

If you have taken money out of the company account for personal purposes you can either pay back the amount or put a complying loan agreement in place before the earlier of the due date and actual lodgement date of the company's tax return for that year. To be a complying loan agreement the agreement requires minimum repayments to be made over a set period of time and the minimum benchmark interest rate to apply – currently 5.45%. The rules are also very strict when it comes to loan repayments because these can actually be ignored if it looks like you are planning to borrow a similar or larger amount again from the company. 

A similar issue can also arise if you transfer funds from a trust bank account, especially where that trust already owes amounts to a related company in the form of unpaid distributions. 

So please make sure you talk to us first if considering accessing excess money in your business bank


What can you do to reduce your tax and the tax paid by your business? The answer is quite a bit but it takes planning pre 30 June. Here are our top tips:

Timing is everything 

Accelerate deductions 

For businesses, if your cashflow is good, make the purchases you need before the end of the financial year to claim the deduction, particularly those with turnover under $10 million. 

For individuals, it's a good time for charitable giving. 

Money or debts owed to private companies 

It's common for business owners to take cash out of their business or for the business to fund some personal expenses through the year – these appear in the shareholder loan account. If this has occurred, it is important that these debts are either repaid by 30 June (you can declare dividends to pay any outstanding shareholder loan accounts) or a formal loan agreement (with specific conditions) is put in place. Without taking action, the ATO will treat any outstanding amount as a deemed dividend taxable in the hands of the shareholder at their marginal tax rate. 

House-keeping for business 

• For Trusts, it is essential that decisions to distribute pre 30 June income are documented in writing. 

• Write-off bad debts • Review your asset register and scrap any obsolete plant 

• Bring forward repairs, consumables, trade gifts or donations 

• Pay June quarter employee super contributions now if cashflow allows 

• Realise any capital losses and reduce gains 

• Raise inter-entity management fees by June 30

Tax Agent CPA Xero