How is business income accessed?
The money a sole trader business structure earns is treated as your individual income, which means that you're solely responsible for any tax the business must pay.
Sole traders can claim deductions for costs incurred in running their business
If you're operating as a sole trader, there is no legal requirement for you to open a separate business bank account, however it is recommended. If you don't want to set up a business bank account, you can use an existing account in your personal name.
Even if you own the company (as a shareholder), the money a company earns belongs to the company. You cannot simply withdraw money as 'personal drawings' from the company funds and use them for personal expenses - company funds must be used for appropriate company purposes.
As a director, the company may pay you wages or director's fees. Your company may also:
- pay you interest on a loan
- provide other forms of benefits
- pay dividends to you as a shareholder.
Anything you receive from the company as an individual, (for example, because you are employed as a director and being paid wages, or because you have received dividends as an individual shareholder) must be shown on your individual tax return.
Private companies that make tax-free distributions to shareholders or in the form of payments, loans or debts forgiven, have to adhere to Division 7A. Generally, Division 7A makes these amounts to be deemed dividends but without any franking credits attached. However, Division 7A allows such payments to be converted into a loan where the terms of the loan (e.g. life of the loan, interest rate charged, minimum yearly repayment) are made on a commercial basis.
As companies exist as a separate legal entity, they must have a separate bank account for the business. The company will be liable for bank fees, depending on the type of account it opens. Signatories are required for the bank account and must be over the age of 18.
- Check out ASIC's Guide for Small Business Directors for more about your legal obligations as a company director.