Tax Tip 40: Tax Issues with Injecting money into Private Companies

Many people fail to realise that a company they may own and control is a separate legal and tax entity from themselves. They start putting money into the company or using their own funds for company expenses without considering the consequences.


Often when these companies fail the people behind them are left with a problem. An administrator or liquidator will take over the company to find be no loan agreements and no records of transactions. They will not only lose their money, but they won’t be able to claim a tax deduction for the loss of this money.


An example is PBR Authorisation Number: 53698 https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/53698.htm


where shareholders incurred expenses to try to keep a dying company alive. The ATO made the following comment:

“You cannot claim a deduction under 8-1 of the ITAA 1997 for expenses incurred on behalf of the company because the expenses were incurred for the purpose of generating the assessable income of the company, rather than your own assessable income. Therefore the necessary nexus between the incurring of the expense and the production of your assessable income is too remote, notwithstanding that the company may have failed had this additional injection of funds not been made. “


Had they loaned the money to the company and the company was unable to repay it they could have claimed a capital loss. And had they borrowed to lend the company they could have possibly kept claiming the interest on the loan - see a future tax tip about this.


There are also many legal issues to consider.


Tip - make sure you treat the company as a separate entity, don’t mix your money and the companies and clearly document any money you inject into the company.

 

I am under the impression that a shareholder could only claim a capital loss if the loan includes interest, otherwise it would be a personal use asset.

 

Yes that is likely to be the case.