The Shareholder Current Account Explained
What is a Shareholder Current Account?
The Shareholder Current Account is essentially a loan from a shareholder.
When companies are registered, the shareholder pays the share capital (often only $100). This is recorded under Equity on the company’s Balance Sheet. Any amount put in by the shareholder in excess of the share capital, is called funds introduced and is usually recorded in the Shareholder Current Account.
Otherwise it is treated as a Shareholder’s Loan.
During the life of the company, funds taken out or put into the company by the shareholders are usually recorded to the Shareholder Current Account. Funds put in by the shareholder increases the current account. Funds taken out by the shareholder reduces the current account.
What are drawings?
As a shareholder, if you are not paying PAYE on any money that you are taking out of the company, then you are essentially taking drawings out of the company. A company is a separate legal entity from yourself, so any funds that it generates is not your money, even if you are the only shareholder. Likewise, if you are putting money from your personal bank into the company then it is your funds introduced into the company.
Are drawings a tax-deductible expense for the company?
The simple answer is no. Drawings are not a tax-deductible expense for the company. You will never see drawings in the Statement of Financial Performance/ Profit & Loss Account of the company. Drawings are recorded in the Shareholder Current Account.
Can a shareholder take drawings from a company?
Yes. However, you should not take out funds that are in excess of what you had put into the company.
What if you have taken out more than what you had put in?
This will create a situation called an overdrawn Shareholder Current Account. This means that the company must either pay Fringe Benefit Tax (FBT) to the IRD or charge the overdrawn shareholder interest, at the IRD prescribed interest rate. The prescribed interest rate is set by the IRD on a quarterly basis. For the current prescribed interest rate go to: https://www.ird.govt.nz/employing-staff/paying-staff/fringe-benefit-tax/types-of-fringe-benefits/employer-provided-low-interest-loans/prescribed-interest-rates
The interest becomes taxable revenue of the company and adds to the already overdrawn Shareholder Current Account overdraft balance.
How to fix an overdrawn Shareholder Current Account
There are a few ways to fix an overdrawn Shareholder Current Account, but we will focus on three common ways.
- Repay the loan from the company.
- Declare a shareholder salary. The company needs to earn a profit to allow a shareholder salary to be paid. The shareholder salary will be taxed in the hands of the shareholder.
- Declare a dividend.
Any one of the above or a combination of them can be used to clear the overdrawn Shareholder Current Account.
Points 2 and 3 above will be limited to any retained earnings or past capital gains and the company must be solvent both before and after a dividend or shareholder salary is declared. A company that has made profits and has paid tax will generally have retained earnings.