You may incur tax penalties and extra tax if you:
1) pay personal expenses from your company’s money without repaying it
2) don’t pay for the use of certain company assets
3) don’t declare money you have taken from your company as personal income.
Examples:
Jim owns and operates a plumbing company.
He regularly uses the company cheque book to pay personal expenses like his mortgage and bills. Jim also decides to use company money to take his family on an overseas holiday. He figures since he runs the company, he can spend the money any way he chooses.
Jim’s accountant advised him to keep the money he uses for private purposes separate from his company’s money, to avoid having to pay penalties and extra tax.
Jim’s accountant advises him of the following options:
Draw a salary from the company, pay tax on it and use that money for day-to-day living expenses such as groceries and mortgage payments.
Repay the company money he has used to pay his private expenses.
Pay for his family’s holiday using money he borrows from the company under an arm’s length loan agreement that he repays in regular instalments.
Example 2
Gary’s company owns a car. Although Gary is not an employee he is allowed to use the car. From 1 July 2009 Gary’s use of the car will be taxed if he does not pay an arms length value to the company for its use. If Gary was an employee, fringe benefits tax may apply. If Gary is not an employee and the exceptions above do not apply, he must declare its use as personal income.