Getting Money out of your Company
Getting money out of your company is not as simple as you might think.
We’re often asked how companies can distribute money to their shareholders.
Sometimes there is a lot of cash in the company, particularly if you have sold the business. As a shareholder, it’s only natural that you want the money out of the company’s bank account and into yours.
The critical problem is that in doing so, you may overdraw your current account.
If you work in the company as an employee, an overdrawn current account is a fringe benefit. When we do your annual accounts, we must charge interest on this overdrawn account at the Prescribed Interest Rate. At the time of writing, this is 5.77%, but subject to change.
If you don’t work in the company, any overdrawn current gives rise to a ‘deemed dividend’. It has the same practical effect.
In either case, the current account keeps getting larger as the interest is charged to the shareholder’s individual current account.
So how can you pay yourself out?
There are a number of options but each has to be considered on their merits. It’s also important to note the difference in income tax rates between a company and an individual. The company tax rate is 28%, whereas the top personal tax rate is 33%.
Getting money out of your company – the options.
Declare a Dividend
A dividend is taxed in the hands of the shareholder. To avoid taxing profits twice, New Zealand has a system called imputation. This means that so long as the company has paid sufficient company tax, there should be sufficient imputation credits to ensure that there is no tax to pay when the dividend is paid to the shareholder.
The imputations cover 28c and when a dividend is declared, the company must pay withholding tax of 5c to bring it up to 33c in total.
On another note, the dividend is not deductible for the company.
This is a complex area and doesn’t lend itself to a DIY approach. We strongly advise consulting your advisor.
The Company buys back Shares
This is complex and involves your advisor considering the contributions that have been made by shareholders as well as the dividend exclusion test. That’s a bit too involved to go into detail for the purposes of this article, so seek advice.
Pay yourself a Bonus
You could opt to pay yourself a bonus salary, so long as it is not excessive. This is a deductible expense for the company. Again, it is taxable in the hands of the recipients.
This is often a good option when you have sold your business and are left with the proceeds in the company. As yet, there is no capital gains tax in New Zealand. So long as you haven’t sold your company to an associated party, the proceeds of any sale can be paid out tax free by liquidating the company. It’s important to note that a liquidator must be appointed before you can distribute any funds.
Withdrawing large sums of cash from a company is fraught with difficulty and it’s essential you seek advice. You can be left with unintended tax consequences if you don’t.
This article is general in it’s application and does not constitute tax advice. No assurance is given as to its completeness or accuracy. Generate Accounting is not liable in any way to you or anyone else for any decision made or action taken in reliance on the information. Before making any tax decision, you should consult an advisor.