When you operate in a company you have to be wary of drawing funds from the company.
This is one of the major pitfalls in how people operate their company.
If you are drawing monies from your company you’re flagging to the ATO that a director loan needs to be repaid. The ATO has tried to discourage this by including a Div 7A loan whereby any debit loans owed to the company is to be repaid over 7 years with interest income being added to the profit so that you have to pay additional tax on that interest. The interest rate is changing every year but it is usually around the 7% borrowing rate.
A Company is a separate legal entity therefore the rules around legal proceedings are as if the company is its own independent person and can be sued. Things such as insurances are company specific and need to be assessed and public liability is dependent upon the industry the company operates.
A company has a set tax rate of 30% on all profits, which could be dropping to 28.5% for small and medium businesses if the budget gets passed and not changed.
A company has directors who manage the company. Directors can be personally liable for superannuation guarantee charges and PAYG payments to employees. The ATO is trying to close the gaps where companies were closing and re-opening under a different name to get around paying unpaid employee balances.
Companies are normally owned by shareholders and can have dividends paid to these shareholders up to the value of 30%/70% of income tax paid by the company. The imputation system provides a way for corporate tax entities to pass on credit for income tax they have paid to their members. This prevents income tax being levied twice – once when the income is earned by the entity, and again when income is distributed to members. The imputation system works by franking a distribution. The franking account is a record of franking credits and debits that arise in an income year. All corporate tax entities are required to maintain a franking account. Typically a franking credit would arise in the franking account when the corporate tax entity pays their income tax or receives a franked dividend. A franking debit would arise when the corporate tax entity pays a franked dividend or receives a refund of income tax it has paid.
Setting up your shareholding is an important part of setting up business as you can direct monies to one shareholder simply by having different types of shareholding which can be beneficial if for example one shareholder has an employment contract outside of the company and earns more money than the other shareholder. If this were the case you would wish to pay dividends to the lower income earner only and we at Forsyths can help you setup your business correctly so that we take advantage of these options.
ASIC is the regulator of companies and an annual fee is payable to ASIC every year. All changes to companies including address changes, shareholding changes, director changes need to be lodged with ASIC and have a time frame which needs to be met otherwise fines will be issued. We at Forsyths look after this process for you but you need to always inform us of changes as they happen to ensure we stay on top of your compliance.Advantages and disadvantages of using a company