Taking Money Out of Your Company? Watch out for this.

It’s a common scenario. In fact, we see it so often it doesn’t surprise us anymore. A business owner takes money from their company to cover personal expenses, uses the company card for everything or withdraws cash without proper paper trails. Whether that money is being used for home renovations, paying down personal debt, or funding a large purchase they’d prefer not to finance through a bank, the intention is usually the same: “I’ll sort it out later.”

The issue is… later comes with consequences.

Why taking money out of your company is important to keep on top of

When money is taken out of a company and not treated as wages or dividends, it doesn’t just sit in limbo. It is typically treated as a loan from the company to the individual.

If that loan isn’t structured and managed properly, as in a loan agreement is not put in place, the ATO may treat it as a deemed dividend. If that happens, it means that the equivalent of what the minimum repayment should have been if it were a genuine loan could be considered assessable income in your personal tax return.

In many cases, this leads to:

• Higher-than-expected tax bills because tax hasn’t been set aside
• Lost opportunities to structure income more effectively and save on tax
• Compounding compliance issues over multiple financial years

So what do we do instead of just taking money out?

We put a Division 7A loan in place. This creates a loan between the company and individual on a more arm’s-length basis, with 7 year payments terms, minimum repayments and interest being charged.

At Proactive, we regularly see business owners paying more tax than necessary, simply because withdrawals haven’t been set up correctly from the get go.

How these situations usually arise

Division 7A issues tend to build over time.

Common examples include:

• Using company funds for personal renovations or lifestyle expenses
  • “It’s our 20^th Wedding anniversary and we’re going to Europe, we deserve it.”
• Paying off personal debts using business cashflow
  • “The time that pipe burst and had to renovate the entire bathroom”
• Covering large one-off expenses without formal financing
  • “Kid A needs a car but let’s save money on car loan interests, they’re a rip off”
• Drawing funds inconsistently instead of paying a structured income
  • “Bill X is due this week. Bill Y is due in a month. Kid B needs new shoes today and Kid C starts piano lessons next term.”
• Withdrawing cash with no paper trail
  • Just getting some cash out for camping trip with the boys next weekend”
• Using the profits of one business to fund another
  • “It’s a start-up, it’ll take some time to grow but don’t worry, Company X is doing well. That can cover it!” 
• Paying yourself a little more this week (a cash advance) to cover unexpected expenses
  • “The dog played chicken with a brown snake, and lost! That was an unexpected hit to the savings account.”
• Paying yourself more one month because you had a record month
  • “I’ve worked really hard this month and it’s paid off! I’m paying myself extra as a reward!”
• Not addressing the previous year’s loan and doing it again the next year
  • “I’ll deal with it later when I can.”

Individually, these may seem manageable but collectively, they can create a complex position that becomes increasingly difficult, and costly, to unwind.

The underlying issue: no clear income strategy

In many cases, Division 7A problems stem from one key gap: there’s no clear or sustainable way the business owner is being paid.

If you’re not receiving a structured wage or planned dividends, it’s far more likely you’ll rely on ad hoc drawings from the business.

Over time, those drawings accumulate and then fall within the scope of Division 7A.

The cost of leaving it too late

The longer these arrangements remain unaddressed, the fewer options are available.

Without:

• A compliant loan agreement
• Minimum yearly repayments
• The correct ATO benchmark interest rate applied (currently 8.37%)

…the ATO may deem the entire balance as income in a single year.

This can result in a significantly higher tax liability than if it had been planned correctly from the beginning.

A more effective approach to taking money out of the company

The first approach would be to look at external financing instead of withdrawing money from the company. However, Division 7A doesn’t mean you can’t access funds from your company. It just means those funds need to be accessed strategically and in line with ATO requirements.

A proactive approach may include:

• Establishing compliant Division 7A loan agreements where required (for those one-off large payments like the house renovations or unexpected vet bills)
• Ensuring minimum repayments and interest obligations are met
• Ensuring you are paying yourself a realistic salary
• Planning dividends in line with business profitability and personal tax outcomes (this could look like a bonus during profitable months as a reward for your hard work)
• Record everything! If you do take cash out of the business, ensure you have receipts for where this cash is going.

Most importantly, it involves forward planning, rather than retrospective fixes.

If you do take money out of your company

As an owner and/or director you can absolutely take money out of your company BUT taking money out of your business without a clear structure is one of the most common, and avoidable, tax issues we see.

Handled correctly, there are opportunities to manage cashflow, reduce tax, and maintain flexibility.

Left too long, it often leads to unnecessary costs and complexity, leaving a bad taste in your mouth, which is disappointing after that delicious European food tour.

If you’ve been drawing funds from your company and haven’t reviewed how it’s structured, it’s worth addressing sooner rather than later. Don’t wait until you’ve been slapped with a huge tax bill to do things differently.

Struggling with Cashflow?

If you need more money in your pocket, now’s the time to get proactive.

Our Cashflow Health Check gives you:
✅ A full overview of where your money is going
✅ Clear recommendations on how to be smarter with your cash
✅ Practical steps to improve your financial position
✅ A one-on-one session with Proactive Accounting Principle, Clea, going through everything in detail.

Investment: From $1650 inc GST for peace of mind, clarity, and a clear plan forward.

Ready to future-proof your finances? Contact us today to book your Cashflow Health Check and start building the business (and life) you actually want.

Need help with your business planning. Read how we can help.