It sounds simple. You own the shares in your Company; you have cash in the bank so you assume you can simply withdraw the cash and spend it how you wish.
Because your company is considered to be a separate legal entity (person) any money it generates is technically not the shareholders even if you are an only shareholder.
By taking more money out of the business than the profits allocated to you by the company, affects your current account causing it to become overdrawn and this create a problem with the IRD.
In simple terms a shareholders current account is an overdraft or loan account, to or from the company. So when the current account becomes overdrawn it is the same as at the bank, you have to start paying interest. Of course, if you have some surplus cash you can pay back the company to reduce the loan,that money is called Funds Introduced.
Where a shareholder is also an employee, the overdrawn current account is a fringe benefit and subject to the FBT rules. Fringe Benefit Tax kicks in when the interest rate being charged against an overdrawn current account, is less than the prescribed rate of interest, which is currently 6.70 % pa.
Where the isnot an employee of the company, any uncharged interest at the prescribed rate on the overdrawn current account balance is treated as a paid dividend and taxable to the shareholder.
In both cases above, so long as the Company charges interest at least at the prescribed rate this removes the need for FBT to be paid or for a deemed dividend to be declared. However charging this interest to the shareholders current account creates additional taxable income for the Company and causes the current account to become further overdrawn.
There are a number of options available but the advantages and disadvantages need to be carefully considered and take into consideration the different tax rates between individual tax rates and the company rate of 28%. Whereas individual rates vary between 10.5% through to 33%.
The difficultly with overdrawn current accounts is that often the physical funds have been taken from the Company, and there is insufficient cash available to meet any tax arising from the interest charges.
It is recommended you seek professional advice before withdrawing large sums of money from your Company.
Provided for the benefit of clients of SUM-it Accounts Ltd.