Are directors’ loan accounts safe?

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Most of our clients who operate their businesses via a company structure utilise directors’ (or shareholders’) loan accounts with assistance from a BAS agent.

If you understand them, nothing is wrong; we would have discussed these with you.

These loan accounts arise when funds are taken from your company as a loan rather than paying yourself a wage or a dividend (if you are also a shareholder).

This benefit for the company is cash flow – as there is no PAYG withholding, compulsory superannuation, or workers’ compensation liabilities associated with loans. The “top-up” tax in the shareholder’s hands is also deferred, if not a dividend.

There is the problem we have brought up in the past. The loan becomes an unfranked dividend under Division 7A of the Income Tax Act – if the loan is not dealt with as required by the Act.

But what happens to these director loan accounts if the company gets into financial problems and a liquidator is appointed?

The liquidator will likely demand the director repay the loan to the company so he can use those funds to pay creditors.

The Director can only be protected from this situation if a dividend has actually been declared to offset the cash taken out by the director/shareholder, and it has been correctly declared. The liquidator would demand repayment if no dividend was declared before the liquidation.

This could lead to problems for the director/shareholder if they have used the money and cannot repay it. The liquidator will vigorously pursue this debt and won’t hesitate to bankrupt the director/shareholder if they can not repay it.

A short-term company cash flow solution has become a severe personal problem for the director.

Don’t hesitate to talk to your client manager if you need clarity on this issue.

Kreston Stanley Williamson Team

*Correct as of August 2017

*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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