Private company dividends

The ATO is reminding private company owners that, under the tax law, private companies are prevented from making tax-free distributions of profits to shareholders and/or their associates. In other words, they must treat their private expenses separately from their company expenses.

Penalties apply

Taxpayers who fail to separate their personal and company money appropriately may incur penalties and have to pay more tax, since any company money used for personal purposes can be deemed to be an unfranked dividend in the individual's hands. To avoid this, the ATO advises taxpayers to use one or more of the following options:

	pay back any money borrowed from the company before the date the company's tax return has to be lodged
	set up a written loan agreement, which meets minimum interest rate and maximum term criteria, before the date the company's tax return has to be lodged, and make the minimum loan repayments each year, or
	ensure the company pays them an adequate salary, wage or dividend, and that they also then pay tax on that income in the normal way.

There is currently an amnesty available until 30 June 2008, to fix any existing errors without needing to contact the ATO or incurring a penalty. This is as long as the error arose due to an honest mistake or inadvertent omission during the 2002 to 2007 income years.

If you think you might be able to take advantage of this amnesty, contact your Saward Dawson manager as soon as possible.

Published : 29 April 2008