Blog Layout

Shareholder Current Account explained

Hamish Pryde • August 4, 2013

The shareholder current account is essentially a loan either to or from the company. Often when companies begin the shareholder pays up the share capital of $1,000 and the balance of the needed capital for the business is a shareholder advance. A loan to the company to allow the company to trade, think working capital.

This loan to the company at the beginning is the opening entry in the shareholder advances account (current account). During the life of the company, dividends or shareholder salaries declared to the shareholder can increase the current account. The current account can be reduced by drawings from the company.

Overdrawn Current Account

A common concept that is misunderstood by business owners is the concept of drawings.  In its simplest form, drawings are cash taken from the business for personal use.  Drawings are not a tax-deductible expense of the business.  However, if you take drawings as a shareholder of a limited liability company, you cannot take out more than you have put in.  Otherwise, this is known as an interest free loan and FBT is payable.  Not a great outcome! 

As a shareholder (if you are not already receiving a PAYE salary or wage) you may take drawings in lieu of wages during the year out of the profits of the business, then when the annual accounts are completed and the companies profit is determined, a salary will need to be paid to cover any drawings.  The shareholder will be liable for tax on this amount in their personal income tax return.   Care must be taken not to take more in drawings than the company is making.   This may leave you in the position of an overdrawn current account where either FBT is payable or the company must charge you interest, which is taxable income to the company at 28 cents and not a tax deductible expense to the shareholder.

We find this a confusing discussion point with many business owners, who see their drawings from the business as wages.  They are only wages, if a salary is declared and paid from the company's profit.  However, if the company did not make any profit, it is not in a position to pay a salary and you will end up with an overdrawn current account.

To fix an overdrawn current account there are three ways. The first is to repay the loan from the company - that is put the money back. Secondly, the company needs to earn a profit to allow an increased shareholder salary to be paid. Finally, by declaring a dividend. However, this will be limited to any retained earnings or past capital gains and the company must be solvent both before and after a dividend or shareholder salary declared.

The advice in this article is general in nature and there are specific Income Tax Act 2007 and Companies Act 1993 legislation (read fishhooks) that need to be avoided depending on your individual circumstances. For advice on your specific situation, call the writer for a discussion.

 

By Hamish Pryde September 11, 2024
Paper is everywhere. We spend a lot of time and money moving paperwork around. But with today’s technology it is now possible to get rid of paper entirely. Digital documents are simpler, easier to store and send, more searchable and permanent. How long does it take to post a document to somebody via the ole stamp and envelope method, that is snail mail? It is more efficient and timelier to email the document. How many times do you go to print a document at home and find that your printer has run out of ink? Why do we still hold onto printing paper documents? Sometimes it’s just because that’s what we’ve always done and let’s face it change can be difficult at first. Paper alone is cheap. But when you start paying for printers, toner, servicing and maintenance, paper starts to look more expensive. Let alone the storage cost. Paper tax records for seven years can be quite a few boxes of paper. We have embraced some paperless technology as part of a modern business practice. This includes digital signatures, digital collaboration, paperless minutes of business improvement and coaching meetings, electronic work papers and my new digital notebook which I am enjoying. We send questionnaires via email to you to gather vital information to enable us to prepare your annual financial statements. This is a PDF document. Instead of printing the questionnaires you could save the document down into a folder of your choice then edit the PDF document and return to us. How do you edit a PDF document you ask? Once you have opened the document the Adobe online editor lets you do some things for free. The online editor works in any web browser and lets you add text, sticky notes and highlights. Click on the fill & sign button to the right of the document, then in the top toolbar click Iab text button. You can add text directly on the PDF document. Have a try next time you have a PDF document open. Xero and Farm Focus users can attach invoices directly to the transaction loaded into Xero. Then if you are looking at the rates expense in the profit and loss account or farm working account, you can drill down into the rates code and see the transactions. Then attached to each transaction is the rates invoice if you use this great functionality. All invoices can now be stored in the cloud. So why paperless? Productivity - electronic documents are instantly and simultaneously available to everyone who needs them. Reduce waiting times with less risk of loss or damage. Cost savings - you will save money on printing, postage and associated costs. You could pay less rent because you won’t need all that space for your files. Security - electronic documents are more secure than printed ones. Digital records can be password protected and rendered unreadable through encryption. Printed documents are only as secure as their proximity to a copy machine. Reduced Clutter - paperwork on desks and shelves are not only untidy it’s inefficient too. The organisation of digital files is simpler and your office will look much neater. That will help you clear your mind to focus on your business. Environmentally friendly - less printing means fewer trees cut down for pulp and less energy used to make and transport paper. Disaster recovery - if there is a fire or flood, recovery from the backup is much easier with digital storage them with paper. There are great help articles available in Xero or Farm Focus if you are not attaching invoices to payments already. To find out how click on the links below: If you would like to explore ways you can go paperless we can help.
By Hamish Pryde September 10, 2024
The Back Pocket Boost
By Hamish Pryde February 24, 2024
When Is the Sale of Land Taxable?
Show More
Share by: