Warning on Bank advice to business owners
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.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, Please do not hesitate to give us a call.
(Courtesy: The Knowledge Shop)
Well Christmas seems but a distant memory and Easter is just around the corner (I think Hot Cross buns hit the stores on 6 January), kids are back to school and the year is well and truly underway.
2016 represents the 20th year of McAdam Siemon when John and I opened our doors on 1 January 1996 at Kangaroo Point and a hole in the wall at Noosa Junction with 4 staff.
Today we operate out of Upper Mt Gravatt, Noosa Junction and have just opened an office in Buderim. Sam Hodgetts joined us as a partner in 2013, having started work in the Noosa Office and 12 staff.
It has been an amazing 20 years with us still acting for clients from our inception.
John, Sam, and I certainly appreciate and never underestimate the loyalty shown by our clients through the good times and bad. (luckily lots more good times.)
This year the team at McAdam Siemon will be focusing on working with our clients so that they can focus and achieve your goals.
To help you achieve this we have developed a number of tools that will allow you to have a better understanding of your business and focus that is required.
1. Breakeven analysis
2. Using your accounting package effectively and efficiently to save time and money.
3. Tax planning tool
4. Fathom – to truly understand your business and set goals
We will discuss these in more detail in future newsletters and of course our experienced team will discuss them in more detail when they meet with you.
We look forward to our continued close working association with you.
Thinking about investing, but worried about market conditions?
Daniel Green may have the solution.
Whilst it’s true that interest rates for investment loans are generally higher, there are very competitive loan options still available to you. By setting up a Principal and Interest (P&I) loan for your investment, you can enjoy similar low rates to those normally offered to an owner occupier.
Many investment loans are interest only, meaning over the period of the loan, the amount owing to your lender will remain the same. With a P&I loan your repayments are calculated on the total loan amount and interest, meaning when you are ready to sell or reinvest, the value of your loan will have decreased.
This could mean increased buying power for your next investment, and more cash available when you sell.
Any taxation matters regarding your investment property should be discussed with a tax professional.
So give Daniel a call today, to discuss making your finance and investment goals a reality.
(O7) 3899 2866
In a typical business your cash cycle looks something like this.
While this can vary slightly from business to business the difference would usually only be in the addition or subtraction of one piece of this cycle. In our model you start your business by investing cash, firstly in your plant and equipment, and then into stock. Next you make some sales, converting your stock into debtors. Once you are paid by your debtors it turns back into cash and the cycle begins again.
The more you can accelerate your cash cycle the faster you turn your profits into cash and the easier it is to manage your liquidity position.
Here are some tips to manage cash flow:
- Plant & Equipment – don’t have too much money tied up here. Avoid surplus plant and don’t invest in plant that is significantly in excess of your capacity requirements. Sometimes it is a good idea to lease plant rather than having a lot of your capital tied up in this area. If you have surplus plant to your requirements consider selling it and turning the asset back into cash.
- Stock – be careful about how much capital you have tied up in stock. Generally the more times you can turn your stock over in a year the more efficient and profitable you will be. Also avoid holding obsolete or slow moving stock. You should be aiming to have your stock levels as low as possible without impacting on the efficiency of your business.
- Debtors – this is an area where lots of businesses have their cash tied up. You need to be on constant alert here and really police this area. Once you have agreed trading terms with a customer, ensure they stay within them. If you allow them to drift out not only are you incurring additional costs but you are also risking a bad debt – and that can really be costly to your business.
Here are a few ideas to help accelerate your cash flow cycle:
- Buy stock on a consignment basis
- Arrange with your suppliers to hold stock for you with the capability to deliver within a day or so of order
- Keep good records on your stock position so you know exactly when you need to order replacement stock
- If you have seasonal stock then be prepared to adjust your price toward the end of the season to avoid having to hold over the surplus stock
- Unless there are significant quantity discounts for buying volume stock only purchase what you know you will need within the immediate future
- Encourage customers to pay cash on delivery (COD) rather than operate on an account
- Offer settlement discounts for account customers who will pay you within seven days
- Avoid opening accounts for small customers or those who only buy from you on an occasional basis
- Allow your customers to buy from you using their credit card
- Always issue your invoice immediately on completion of the job
- Be prepared to stop supply if a customer does not pay you within agreed trading terms
- Always complete credit checks when you are opening new customer accounts
Call or Contact us us if you would like some more information.
Brisbane: 07 3421 3421 (Rob & Sam)
Sunshine Coast: 07 54748955 (John)