Hiya, I’d really appreciate if someone could answer this question for me. My accountant seems to speak in riddles sometimes and it’s hard to get a straight answer from him.
Okay, my question is:
if I own a small business that makes, say 80k profit (before tax) and I pay myself wages of 60k (before tax). Is it legal for me to take the remaining 20k from the business funds and use it as a deposit for an investment property instead of declaring it as taxable business income?thanks very much,
SallyWhat is your business structure? If it is a Trust or sole trader it makes no difference whether you call it wages or hush money, it is still attributed to you 100% taxable – ie as a sole trader your taxable income in the business is your taxable income as an individual, and a Trust will have to distribute all the income each year which will be a fully taxable distribution to you.
If you have a company there could be even bigger problems than having an extra 20k added to your taxable income.
The options are:
sole trader – no option you are taxed on the full 80k.
Trust/company – maybe you could buy a property through the company/trust. have a chat to your accountant about the logistics of this, otherwise your trust will distribute the full 80k to you (or split it up between the beneficiaries) and you get taxed on it anyway, or your company may be able to issue you a dividend (hopefully the company would have franking credits available for such a dividend)you might find the best option is to say to your accountant “I want to take 20 grand out of the business, what is the most tax effective way for me to do this”.
Remember you are paying your accountant to help, if you dont understand ask him/her to explain it to you in more simple terms.
Many people get in trouble mixing business funds and personal funds – plus you may pay more in accounting fees as your accountant tries to work out what you did!thanks so much for answering my question, regards,
sallyI am sure you can invest it into property, however what you may be overlooking is, the $20,000 is an asset and the cost of the property is an asset so it does not become a deductible expense.
The interest on loans to buy the property and running costs are the deductions.Check with your accountant again!!!
Thank you pigs fly,
I think I may be able to purchase investment property with the 20k, and my business will own 20k equity in the property and when I sell it, I will nedd to repay the money to my business and pay the tax on that 20k. Does that sound right?
What do you think about that plan?
I have another question to sneak in aswell if you don’t mind …
Is there a limit on the ammount of money a sole trader can pay into their own super fund? i.e, if I didn’t use it to purchase property could I just put it into super? cheers,
SallyHi
‘business’ is a vague term.
Most people who say business are probably actually sole traders. If you just have a business name, then you are probably a sole trader. This is not an entity. The business is yourself, legally.
But if your business is a company, then this is a separate legal ‘person’.
If this is the case, then your company would earn $80,000 but pay you $60,000. Netprofit of the company would be $20,000. So the company would pay tax on this at 30% – assuming it had no other expenses. It could then lend you some of the left over money to buy a property.
However, there are various rules about borrowing money from your company. So discuss this with your accountant. Depending on your overall income, it may be better to just pay yourself also.
Terryw
Discover Home Loans
Parramatta
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Hi Terry,
My accountant suggested the idea about equitising that 20k so that my business owns 20k worth of my investment property, and you are right, I am a sole trader so my business is just me.I shall ask him about the laws effecting borrowing funds from myself/business for investing if I am not a company.
thanks for your advice/time
cheers,
SallyHi Sally if your business is a sole trader, then you are the business. You cannot really borrow money from yourself.
Terryw
Discover Home Loans
Parramatta
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Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Hmmmm, what to do? I am a sole trader and my accountant suggested the equity idea, but you say that it could be illegal to borrow money from “myself” I wonder why he suggested that option knowing that i am a sole trader? Do you know any good books or sources of information I could educate myself with (I’m not interested in doing an accounting degree) something in basic language for non financial types?
cheers terry,
sally
Hi Sally
I dont think Terry is saying it is illegal i think he means it will have no different tax consequences and therefore seems inpractical.
If you were to purchase a property as Tenants in Common you could hold say 80% of the shares in your personal name and 20% in say Company name (not sure why you would) but if you are Sole Trader anyway you do it would still mean that the property was owned 100% by yourself.
Cheers
Richard Taylor
Residential & Commercial Finance Broker
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Or you could gift/loan the money to a trust and the trust purchases the property.
Could you restructure the business to be more tax effictive?
What are you dealing in?CATA
Asset Protection Specialist
[email protected]Hi, It is not illegal to borrow money from yourself, just impossible. (I am not an accountant, so maybe wrong).
Just the other day I asked myself to lend myself $20, but I said I couldn’t be trusted, I then got angry with myself for not trusting myself. In the end, I got the $20.
Maybe your accountant is suggesting you just take some of the profits from the business and put them in property?
BTW, does your business have a separate tax return from yourself?
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi everyone, thanks for taking the time to comment,
I am a sole trader and my business and myself only have one tax return (I think). I pay wages to myself from the business and have a PAYG system set up so that I can pay income tax on my personal wages.I guess what i’m trying to clarify is how i can minimise tax on the remainder of the funds made by the business each year.
I do own an investment property which I purchased last december
but i am confused as to whether this can be classified as a business expense that belongs to my other business outgoings or not. (My business is not a property investment business). The property is tenanted and I have to make up about $20 per week in shortfalls to pay the mortgage, rates, etc.I had a look on the ATO website and read that only interest payments on investment properties are tax deductable, but I’m not sure if that is just for people who work for someone else ie; get all their pay, tax and super sorted out by their employer etc.
I do not have a super fund and so I was hoping that by purchasing an investment property I might be able to catch up a bit financially.
but I’m very confused about all the tax stuff now.again, thanks for your time and advice chaps
sallyHi Sally
I think it is your Accountant who is causing your confusion as he doesnt appear very clear on his advice.
With regards to your Superanuation issue and maybe other insurance issues it is probably better to liase with a Financial Planner.
Which part of Oz are you in.
On the matter of interest deductibiliy on your IP then this is deductible whether you are employed or self employed. Have you undertaken a Quantity Surveyors on your property. If not this maybe a worthwhile investment to see what else you claim in the way of non cash deductions.
Also make sure that you have your Accountant all the borrowing costs when you purchased the property to ensure that they have been correctly claimed.
Cheers
Richard Taylor
Residential & Commercial Finance Broker
100% Finance on selected properties in the USA.
Email us to be added to our mailing list.
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Ph: 07-3720 1888Richard Taylor | Australia's leading private lender
As Richard has already mentioned, you need to get CLEAR and PRECISE advice from your accountant (in writing would be nice
)If you are indeed a sole trader as you say (Ie ONE tax return and you have NO ACN). then iam worried and interested to know how your accountant is processing salary & wage payments to yourself.
Find out exactly what your structure is, we can probably help from there.
-P
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