Company tax and depreciation

Discussion in 'Accounting & Tax' started by swaters, 25th Jan, 2020.

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  1. swaters

    swaters Member

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    Hi guys, if I have a company that earned say $30k (meaning now has 30k cash in the account) and I get a car loan to buy a car for $30k, the entire 30k will be wiped off against the company income (instant asset write off). Therefore the company taxable income is 0 correct?

    If over the course of a year, I spend a total of 5k for car expenses and interest repayments, I will be left with 25k cash in my business bank account. As the taxable income is 0, does this mean I can use or withdraw this 25k cash to my personal account without needing to pay tax?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    No. The company is a separate legal entity. It would have to declare a dividend to shareholders or a wage etc
     
  3. swaters

    swaters Member

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    Thanks. So this means the company can declare dividends without paying tax on those as its taxable income is 0? Only the person receiving the dividends will need to pay tax according to their tax rate?
     
  4. Trainee

    Trainee Well-Known Member

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    With a net loss how does the company declare a dividend?
     
  5. swaters

    swaters Member

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    Let's say this is a newly set up company and there's no previous years, to keep it simple.

    Yes that's my point, the taxable income is 0 (or net loss due to depreciation etc), so technically there's no dividends to declare, BUT there's still 25k in the business account.
     
  6. Mike A

    Mike A Accountant Business Member

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    And you will need to keep a logbook for a 12 week continuous period to prove your business kilometres

    And make sure you complete an fbt return
     
  7. swaters

    swaters Member

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    All that is fine. I'm curious as to what happens to the 25k cash and how it is treated when the taxable income is 0?
     
  8. Ross Forrester

    Ross Forrester Well-Known Member

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    If yo borrow money from the company you will need to repay it. You can do that by offsetting dividends, salary or something like that.

    it is not uncommon for a company to have cash accumulated without paying tax. If you look a the R&D tax offset this often creates this outcome.

    When you eventually repay the loan the cash will disappear.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    If a dividend is paid it won't be franked. Depreciation r duces franking credits
     
  10. swaters

    swaters Member

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    How can dividend be paid if taxable income is 0? Or is this thinking wrong?
     
  11. swaters

    swaters Member

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    If I take out the accumulated cash, it will be seen as a loan. Does this mean I will need a proper loan agreement and terms in place?

    Or can I just take it out and repay it before end of financial year?
     
  12. Ross Forrester

    Ross Forrester Well-Known Member

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    A loan done in the correct way is prudent.

    If you repay the loan you should be ok but check with somebody this is all general stuff. There are rules against borrowing then repaying then borrowing again.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    The company should seek legal advice on this on the Corporations Act requirements and also restrictions in the constitution of the company.

    There is no restriction to prevent a company paying a dividend just because its taxable income if $0
     
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  14. Mike A

    Mike A Accountant Business Member

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    depends what you do with the cash.

    if you leave it in the company and use it to reinvest in the business no issues

    if you take it out you will have Division 7a issues you need to address otherwise you will have an unfranked dividend.
     
  15. Mike A

    Mike A Accountant Business Member

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    Section 109R might cause you a problem if you repay it before the end of the financial year and then take it out again in the next financial year.

    It wouldn't be considered a repayment.
     
  16. Big A

    Big A Well-Known Member

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    I am not an account or expert by any means all the responses so far seem to be causing more confusion then giving any real answers.

    this is how I see it. No you can’t take the 30k out as un taxable income. Just because the instant asset write off is available yogurt aren’t entitled to it because you have not actually paid out the 30k as yet. You can only tax deduct the payments you have made to date. So if you have made a 2k loan repayment then that 2k is tax deductible. The remaining 28k is not tax deductible as you have not actually paid it yet.

    Again I might be wrong as I am not an accountant. But that’s how I see it and I think that’s what your asking.
     
  17. swaters

    swaters Member

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    Appreciate your answer, yes it is confusing. I'm still trying to get my head around it and have already spent like 5 hours reading and learning about it today lol.

    In regards to your response, the 30k is written off even if a loan was used to acquire the asset.
     
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  18. Big A

    Big A Well-Known Member

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    But then you have not spent 30k that you have earned. It’s 30k that you borrowed that was spent. So there would be a taxable component to the 30k you earned.
    I am sure most accountants would be able to give you an easy answer to the question.
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Just remember companies are separate legal and tax entities and you cannot just use its money. Companies can pay wages or dividends but you could also borrow but this comes with different consequences
     
  20. swaters

    swaters Member

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    I see. What is the relationship between taxable income and accumulated cash? I'm not sure if the terms I'm using are correct. Basically my understanding so far is if the company's taxable income for this year is 0 (due to depreciation or instant tax write off), the accumulated and left over cash for this same year won't be taxed but there will be consequences once the cash is distributed outside of the company (as dividends, directors fees, wages, loan etc).