ATO increases focus on personal use of company funds

The Australian Taxation Office (ATO) is intensifying its efforts to curb instances where business proprietors divert funds or utilise company assets for personal benefit.

It's a common occurrence for business owners to blur the lines between their personal and professional lives, often intertwining their personal expenses with those of the company. In private businesses this is very easy to do as the business is so linked to the key individuals who are the foundation of the company and ultimate owner after all. However, the ATO is adamant about enforcing tax laws that prevent individuals from accessing company profits or assets tax-free.

To address these issues and ensure any reward for ownership of a business is taxed, the ATO has initiated an educational campaign to highlight the ramifications of such actions, emphasising the importance of compliance with tax laws. If past experience is a guide the period of education and awareness will be followed by a period of review, audit and correction – including penalties – for non-compliance. Division 7A of the tax law specifically targets scenarios where private companies provide benefits to shareholders or their associates through loans, payments, or debt forgiveness. This division aims to ensure that shareholders appropriately pay taxes on any benefits received from the company.

To avoid adverse tax implications, recipients of such benefits must either repay the amount before the company's tax return deadline or establish a compliant loan agreement with minimum annual repayments at the prescribed interest rate. Despite Division 7A being in effect since 1997, common problems persist, including improper accounting for company asset usage, non-compliant loans, and erroneous interest rate application.

Managing tax consequences related to shareholder benefits requires diligence and adherence to certain practices, such as refraining from using company funds for personal expenses, maintaining thorough company records, and ensuring any loans to shareholders comply with written agreements.

If you have any questions about this topic, please don’t hesitate to get in contact with your local PKF adviser.