If you've set up a small business in the last year or so, then you may be approaching tax time and need to make your first representations to the ATO. You've been using some accounting software and feel that you have done quite a good job in recording all your affairs, but now you need to look into all the finer details and may be about to come across a surprise. What should you do if your end-of-year software details something called a director's loan account?
Understanding the DLA
If you are like many small business owners, you may never have heard of such an account before and will certainly want to know what is involved. Typically, this account is essentially a bookkeeping practice and details any money that you may either owe the company or it owes to you.
In and Out
During the course of the year, you may have made some small withdrawals for petty cash purposes or used your company to make health and life insurance payments on your behalf. Perhaps the business paid for the odd meal here or there. All of this information will be recorded against this type of account.
On the other hand, you may have decided to allocate yourself a salary as a director but did not actually withdraw the funds. Sometimes, people have a separate source of income and decide to proceed that way, and in this case, the amount will be held as a balance in the director's loan account.
Account Reconciliation
As the end of tax season, you will need to reconcile the situation for the preceding 12 months. If there is a positive balance, then you will be able to withdraw these funds for your own use, tax-free. However, if there is a negative balance then — in an ideal world — you should try to pay money in to zero the account. If you are unable to or choose not to, then the tax authority may well impose a corporation tax charge based on the outstanding balance. In other words, they will treat this as a loan to the company, and this tax charge will be outstanding as long as the loan remains unpaid.
Ask Your Accountant
If you're unsure about the repercussions or may need further advice, talk with an accountant like Marisa Gonzalez. You may need to put in place new procedures in the future to deal with this type of account.
