Owning a family company comes with significant responsibility regarding how payments from the company to you or your family member are handled. Most payments from a company are considered as dividends in the recipient’s hands, except the return of original capital.
For example, if your company provides you or your associate with a loan, it’s generally deemed as a dividend unless specific requirements for a “complying loan” are met, including the imposition of a market interest rate. Any forgiveness of such a loan is treated as a deemed dividend, subject to meeting certain criteria.
This issue of treating company loans to shareholders or associates as deemed “Div 7A dividends” is a longstanding matter in tax law and requires careful consideration. It also extends to scenarios where a family trust distributes income to a corporate beneficiary, but retains the amount within the trust, potentially triggering a deemed dividend.
Additionally, loans made by shareholders or directors to the company, and their subsequent forgiveness, carry tax implications. A complete forgiveness of debt may trigger a capital loss for the shareholder or director. Moreover, forgiving debt has consequences for the company as well. While there’s no immediate taxable gain, it could affect the company’s ability to claim deductions in the future, impacting its operations.
The key takeaway is that just because you own the company, doesn’t mean you can treat it as your own private bank to make withdrawals from, or make loans to it without considering the serious tax consequences of such actions. Professional advice is essential to navigate these complexities effectively. If you require assistance on this matter, feel free to contact us for guidance.