Shareholder current accounts explained

What is a shareholder current account?
What are Drawings?
The shareholder current account is essentially a loan  from a shareholder.
When companies are registered the shareholder pays a share capital (often only $100). You would see this recorded under Retained Earnings 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 recorded in the shareholder current account.
During the life of the company, funds taken out or put into the company by the shareholders is 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 legal entity so any funds that it generates is not your money, even if you are the only shareholder in it.
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 business?

Simple answer is No, drawings are not a tax deductible expense of the business. So you will never see drawings in the Statement of Financial Performance/ Profit & Loss Account of the business.
Drawings are posted in the Shareholder Current Account.
Can a shareholder take drawings from a business?
Yes, however you cannot take out funds that is in excess of what you had actually put into the business.

  •  So, 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 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 and for the quarter ended 31 March 2017 this was at 5.77%.
The interest becomes taxable revenue of the company and it further exacerbates the shareholder current account overdraft balance.
How to fix an overdrawn shareholder current account?
There are a few ways to fix an overdrawn current account but we will focus on three common ways.
1. Repay the loan from the company.
2. 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.
3. 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.

Paying a Dividend.The advice in this article is general in nature. Your specific circumstance may vary therefore you should seek our advice for your situation.  Contact

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