Over the years, we have seen many many companies, where the Director has been very surprised to learn that they owe the company money. In years gone by, it was common strategy for the Director to take money out of a company by way of a loan, which often had no immediate terms of payment, so as to avoid paying any taxes. The landscape changed somewhat, when the Tax Office become concerned about Division 7A Loan Accounts, and as a result, often there is a loan agreement between the Director and the company, when a Director takes funds from a company.
It never ceases to amaze us how often the Directors are surprised by amounts that they have drawn from the company and which has shown in the books as money owed by them back to the company. Most Directors consider that as it is their company, they are solely entitled to the funds, and as a result it is not a loan at all.
In a recent matter that we have been involved in, it became apparent that the Director had been drawing an amount $200,000 to $300,000 per annum from the company over a period of time. I should say, that this was in addition to a substantial salary that was paid to him. As a result, by the time the Director came to see me, the loan due back to the company, was in excess of $2,000,000. The Director had no real ability to repay those funds given that a substantial amount of funds appear to have been used as lifestyle expenses. This factor alone, potentially made the company insolvent, given the company had what could otherwise be described as a healthy business.
A number of lessons come out of such matters for us, they include:
- Paying tax by way of PAYG withholding, and therefore a salary, drawn from the company, is not such a bad thing. It allows the Director to know exactly where the company is at.
- Closely monitoring loan accounts of the company is imperative, as ultimately, if the company becomes insolvent, a liquidator may be looking to recover from the Director which may ultimately effect the solvency of the Director.
