In a previous blog post we talked about Directors’ salaries: how they get paid, what they can expect to be paid, and how their salary can affect the potential growth of the company.
Now let’s talk about what can happen if they start paying themselves more than the company can afford.
Is your salary hurting your company?
Companies get into financial trouble for a variety of reasons—unexpected bills, unpaid invoices, a sudden shift in the market, and so on.
It can also happen when the company Director’s salary is higher than the company’s profits.
If your company is struggling to pay its debts (BAS, suppliers, superannuation, rent, your accountant, etc.), you need to talk to your accountant as soon as possible. (The sooner you start addressing your company’s financial problems, the better chance you’ll have of solving them.)
But what if you can’t solve them, and your company becomes one of the 9,000-plus companies that has a liquidator, administrator or receiver appointed to it each year
That depends on how you’re being paid.
If you’re being paid a salary, you may personally owe the Australian Taxation Office (ATO) any unpaid PAYG tax your company has withheld from wages paid to you and your family. (They usually get it back by applying personal tax refunds against the debt.)
But if there’s a director loan1 on your company’s balance sheet when it goes into liquidation (i.e. you’re being paid through drawings on a loan account), the liquidator will demand you2 pay the full amount.
Be warned. If you haven’t been making profits to distribute dividends from, or your accounts haven’t been prepared for some time, the loan balance may include several years’ worth of wages. That means the liquidator count be demanding $200,000 or more from you personally.
So not only will you have effectively worked for free in that time, you may also have to sell your home to pay the liquidator. You may even have to declare bankruptcy.
All because of how you chose to be paid (or often how your accountant decided you should be paid).
Should you still get paid if your company can’t pay its debts?
Knowing you may need to repay your wages to a Liquidator, should you still pay yourself a wage when your company is going through a rough patch?
Giving up your salary or investing personal funds may do more harm than good. Not only will this be a Band-Aid solution delaying the inevitable, you’ll also be crippling your own finances. You need to cover your own living expenses, which will become even harder if your company enters liquidation and you become unemployed. Besides, how can you make sound decisions about your company if you’re worrying about your own finances as well as the company’s?
If you don’t think your company is making enough profit to cover your wages, or you suspect it’s in financial difficulty, talk to your accountant. Find out how your wages are accounted for, and how to minimise your personal exposure. For example, if you take drawings on a loan account you may need to switch to being paid a salary. Your company’s tax liability may increase, but you’ll limit the amount you’ll need to pay the liquidator.
If you think your company is in financial trouble, or want to know more about minimising exposure to claims by Liquidators, get in touch with us today for an obligation-free confidential discussion. We specialise in helping company Directors deal with all aspects of running a small to medium business.
1You can find more information on Director loan accounts at the Pearce & Heers website.
2And by “you” they mean you, not your company.