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Do you have a Director Loan Account? In this real life case study we’ll share with you what happens when the Company’s main asset is a Director Loan Account that’s inappropriately used.
Lauren, a Director of her own company, reached out to LemonAide for help. To reduce her company’s PAYG tax bill, her accountant had used a Director Loan Account instead of receiving a wage. It’s a common strategy to effectively reduce company tax but it’s a double-edged sword.
In Lauren’s case, it meant the Company’s largest asset was the Director Loan Account. It totalled almost $497,000, but it could never be paid back in full. The reality is, the recoverability of the Loan Account was a lot less than the amount stated in the Company’s balance sheet. Now, Lauren’s company owed the ATO $210,127 in respect of GST, PAYG and compulsory superannuation payments to her staff.
When we sat down to talk with Lauren, she was distraught and feeling totally overwhelmed by her situation. She wasn’t sleeping, hardly eating and felt very embarrassed about her financial position.
What could be paid back?
As part of our analysis of Lauren’s financial situation, we reviewed her personal asset position. She had recently sold a property which had left her with a residual cash payout of $100,000. We documented her personal asset position and presented it to the Company. We then proposed a settlement offer of $65,000 in full and final satisfaction of the debt owed to the Company. Even though Lauren was the sole Director of the Company, you should remember that the Director personally and the Company are separate legal entities. The settlement offer was accepted.
This money was used to pay the employee superannuation contributions in full – including all admin charges, nominal interest and general interest charges. After this was finalised, Lauren’s company was put into liquidation.
During the Liquidator’s investigations, it was found a further claim could be made against Lauren, as Director. However, we were able to demonstrate it was not in the best interests of the Company’s creditors to pursue Lauren further as she did not have any assets left to satisfy the claim.
In addition, we worked with Lauren’s accountant to reduce the impact on her personal tax responsibilities resulting from the use of the Director Loan Account.
Now, Lauren is slowly getting back on her feet. While extremely stressful at times, Lauren says she has learned an important business lesson and is looking forward to re-establishing her business.
Can you identify with elements of this case study? If so, book an appointment with us. For a small investment of $795 plus GST we’ll look at your financial situation and provide you with a strategy to untangle any issues you have with your Director Loan Account. It’s important this account is regularly reviewed so if you aren’t sure where you stand or fear you may be in a similar position to Lauren, get in touch with us.
If you choose to engage LemonAide to help you implement your strategy, the investment will be credited back to you throughout the process. That means you really have nothing to lose so get in touch today.