What is a Shareholder Current Account (SHCA)?
It sounds simple. You own the shares in your company; you have the cash in the bank so you can just withdraw the cash and spend it how you wish, right?
Actually, it’s not that simple – because your company is viewed as a separate legal entity (person), any money it generates is technically not the shareholders, even if you are the only shareholder. Taking more money out of the business than the profits allocated to you by the company, could lead to your current account being overdrawn and this could create a problem with IRD.
Basically, a shareholders current account (SHCA) is an overdraft or loan account, to or from the company. Therefore, when the current account becomes overdrawn, it’s like the bank – you have to start paying interest. Of course, if you have some extra cash you can pay back the company to reduce the loan – and that’s called Funds Introduced.
If a shareholder is also an employee, the overdrawn current account is a fringe benefit and subject to the FBT rules. This kicks in when the interest rate being charged against an overdrawn current account is less than the IRD’s prescribed rate of interest (currently 5.77%) per annum.
If the shareholder is not an employee, and no interest is charged at the prescribed rate on the overdrawn current account balance, then the balance is treated as a paid dividend, and is taxable income of the shareholders.
In both cases, so long as the company charges interest at least at the prescribed rate, the need for FBT to be paid, or for a deemed dividend to be declare is removed. However, charging 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 to improve an overdrawn shareholder current account. The advantages and disadvantages need to be carefully considered, (e.g. the different tax rates between individuals ranging from 10.5% to 33% versus a company rate of 28%).
The dilemma 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.
We recommend you seek professional advice before withdrawing large sums of money from your company, to ensure all tax implications are considered.
If you have any queries or want to chat with a tax specialist, give us a call on (04) 972 4182, (09)-282 3054 or (03) 666 0124 or email firstname.lastname@example.org.
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