DIRECTORS SPEND & WAGES

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Our director spends from business bank account for personal items and I want to allocate these amounts as a 'wage' for him each month. The accountant sorts out his director's fees at the end of the year and wants me to mitigate the large payg and super payment due then by doing this, but I am not sure how to do this against these spends that i have allocated as 'drawings' so far (although i do realise they are not correctly drawings either) I have been allocating his wage as paid via the cash account so not to have issues with bank rec but i need to reconcile against his spend whilst still generating payg and super amounts by including him in payruns. Any help appreciated! 
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Posted 6 months ago

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Kevin Russell, Accredited Partner

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Don't do it. These are drawings. If he wants to pay himself a wage, do it legally and let him pay the tax. Or do as you are told and risk the wrath of the ATO. Your choice. I'm stunned he would put you in this position. It isn't right.
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Kevin Russell, Accredited Partner

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Don't do it. These are drawings. If he wants to pay himself a wage, do it legally and let him pay the tax. Or do as you are told and risk the wrath of the ATO. Your choice. I'm stunned he would put you in this position. It isn't right. The business bank account is NOT his own personal piggy bank
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I'm sorry, Kevin,   may have not explained properly, these are to be director's fees, where tax and super will be paid, as is correct. He does not get the wage, he spends what he needs and that becomes his wage/fee amount. There is nothing wrong with that, it is just about allocating correctly and any difference at the end of the year between his spend and wages paid will be shown as director's fees and the remaining tax and super paid. I am just not sure how to allocate it to ensure the payg/super is generated and the wage is equal to that spend.
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Kevin Russell, Accredited Partner

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Nothing wrong you say. Except he hasn't paid any tax or super or payroll tax or workcover. Okay. Honestly I was just trying to help. Have a great evening
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I'm confused. The reason to allocate the spends as wage is exactly to pay the tax/super/workcover over the year instead of it being an amount at the end of the year when the accountant does it (director's fees attract all of those things) but instead of paying him the fees through the bank his spend becomes his wage/fee and i just wasn't sure how to make sure the payg and super is generated (and paid) unless i do it through the payroll, but then how to journal that to be what he has already spent? (if i did allocate his spend as a director's fee (expense) it wouldn't generate the super/payg amounts)
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Kevin Russell, Accredited Partner

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I'm not confused. He is taking money out of the business and not paying tax or super on it. He should be paying himself a wage and paying for his own whatever. That said I guess you COULD take the total amount and create a pay cheque for the entire year after you gross it up for tax. The problem is it can get quite messy. And of course it's unnecessary. I'm amazed the accountant is okay with this. And you don't need to use journals. Ever. Not for cash items. Do you know how to gross the amount up so you get the taxable amount?
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Thanks Kevin, but just to be clear, I understood that by allocating his spend as a wage he is paying tax and super each month. If he was paid a director's fee per month or a wage per month, he would be doing the same. Not good practice (and a pain for me) to be spending from biz account but hard for me to do anything about it,except make sure that all personal as opposed to business expenses are properly allocated and they are.Am i missing something about that here?  My problem is that when the wage is generated I don't actually pay (the nett)  because it has already been spent as drawings. By grossing it up and doing it for the year it doesn't solve my issue, the accountant will do the calcs at the end of the year for any difference anyway. The reason the accountant wanted to do it this way was to make the end of year amount less of a big payment to the ATO etc, so more of a cashflow reason, not because it won't be paid or dodged. I'm still unsure as to the best way to do the allocation?
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Kevin Russell, Accredited Partner

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So just put it to his loan account and have him put on an IAS. That way he can pay tax in installments. I dont know why the so called accountant hasn't done this already. Effectively he is taking untaxed dividends.
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Okay, thanks, I have been having probs not so much with the result but how to do it in Reckon and it looks like there is no easy way to do it from what you have said. Thanks for your help.
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Kevin Russell, Accredited Partner

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Well its messy anyway. Have you thought of asking the accountant what he is being paid to do? You aren't the tax agent. I think he needs to take a bit of responsibility here. He is putting you in an awkward position. You shouldn't accept it.
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Graham Boast, Accredited Partner

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Hi accounts.

This is not an uncommon (or illegal/immoral) situation in private companies, particularly where the director is a sole director, or where 2 directors are spouses. 

I think it's a great time to start thinking about issues like this: Single Touch Payroll reporting will, I suspect, make it harder to just leave things for the accountant to sort out later.

First, you need an "other Current Asset" account set up. Call it "Loan to Directors" or "Directors Drawings" - whatever fits.

Second, set up a monthly payroll for your boss.  It will have 3 Payroll Items:
  • A Wage/Other called Directors Fees and linked to an expense account "Director Fees linked to an expense account "Directors Fees";
  • A Deduction Called "Repay Directors Loan" linked to the "Loan to Directors" Account set up above;
  • Super
Third, run the payroll at the end of each month.  Your target Net Pay will be the amount that the Director has drawn that month.  You will have to find the Gross Pay by trial and error, as it will be affected by tax.  Eg the net $5000 payment for a monthly pay requires $6560 Gross



Accountant happy, ATO happy, superfund happy, workcover happy, director happy.


 

Graham Boast 0409317366
graham@reckonhelp.com.au

 
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Kevin Russell, Accredited Partner

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Dont think it ought to be encouraged Kwik. The FIRST principle we are taught in business school is that the enterprise and the individual are separate if not legal entities then at least logical entities. And theres a reason for that . I might leave you to ponder that. Good day.
Don't need to ponder anything, every business or client I have ever worked in for over 40 years has had a drawings or shareholders loan,nothing illegal about any of it, if it is then every accountant will be in deep do do.  

sole trader owns the drawings and income anyway and a company loan, depending which way it goes, is either an asset or liability to the company and dealt with accordingly under the law by the Accountant.

Still nothing illegal, what 'accounts' is saying the accountant usually organises a lump sum to PAYG and super close to EOFY to convert the personal drawings (directors loan) to an income pay the tax to the ATO and sGC requirement. (all above board).  

In this case "accounts" has been asked to do this monthly and avoid a rushed 2 lump sum payout at the EOFY.

Still nothing illegal, he is declaring he has used the money for personal use, is paying the prescribed PAYG to the ATO and fulfilling his super obligation.

Win Win!!

If a company has a home office, they all put the electicity, phone, internet, insurance through the business and split it to business % use and personal % use, and this is put through the accounting system as a.....oh, guess what, directors loan account...

Mmmm 
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Kevin Russell, Accredited Partner

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The entity concept is the foundation principle of accounting. My fundamental point is the accountant has been wasting time lo these many years rather than help to get things right. I would let him fix it. Thank you for your time.
(Edited)
You told 'accounts' to "do it legally" this infers they are doing something 'illegal'

legal definition: 1. connected with the law: 2. allowed by the law

 In this case this poor 'accounts' person has sort help on how to implement what an Accountant had requested, and was basically accused of doing something 'illegal'.

People come to this site for help, not accusations, a lot are totally  new to any of this, and need to be guided in the right direction to the correct way, best practices and reference to the legal requirements if required.

By the look of some of this correspondence this 'accounts' person will probably never visit this site again, nor have a good word to say about the Reckon community.
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Kevin Russell, Accredited Partner

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Infer and imply are two different words. The listener infers and the speaker implies.
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David Elliott

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Now that the heat in this debate has somewhat subsided, I offer a couple of questions and thoughts:
  • Does the Director understand that, even if he is the sole director and shareholder of the Company, the money and other assets of the Company are not his, but are the property of the Company?  If not, he needs to have a yarn with his lawyer.
  • The procedure outlined by Accounts and more-or-less endorsed by Graham & Kwikbooks is certainly not "Best Practice".  Sure, I too have encountered this practice, and over more than 40 years, but long term use doesn't make it "best practice".  I would put the view that the practice is no more than a means to an end or a convenience in situations where a strong willed director won't take advice and insists on doing things his way.  Accounts and others are effectively obliged to find a mechanism to cover for their boss' intransigence. 
  • Of course years ago life was easier in these areas.  But not today!  There is much more reporting required and many more penalties if PAYG tax or super is not accounted for or paid when it is supposed to be.
  • Everone needs to consider the possible ramifications of the what happens if the Company gets into financial difficulties.  Will PAYG tax and super for the Director continue to be recorded and paid?  No doubt the "drawings" will continue unabated.  If a formal insolvency administration ensues - who knows where the Director will stand with respect to repaying his undocumented drawings/salary, conversion of the Company's funds, not to mention insolvent trading.
  • At the end of the day, the Director should adopt a disciplined approach to his company and follow Best Practice.
However:  A.ccounts, Graham and Kwikbooks have answered your original question.
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Kevin Russell, Accredited Partner

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Dave Well I think we have an ethical obligation to not countenance poor or shoddy practices which was the tenor of my original reply. I think it's time for the bookkeeper to back off and the accountant to earn his fee and step up. I can't think of any reason to let these things slide
(Edited)
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Graham Boast, Accredited Partner

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Ok. Let me give you a scenario that I see often.

A director is the sole shareholder and director of a company.  The director has budgeted for a wage of 90,000 plus super for the current financial year, but wants to leave as much money in the company as possible until it is clearer how the year may pan out. The director is entitled to be paid monthly in advance. To make thing simple, the director just draws against company funds during the month, being careful not to exceed the net amount expected. At the end of the month, the actual net wage is determined, grossed up for PAYG, and paid as Directors Fees. Super and PAYG for the month are submitted to the ATO and super clearing house.  At the end of the financial year, the Director may or may not top up the wage.

The Director understands perfectly their responsibilities as a Director.

This scenario fits what accounts is trying to do. What is your advice now?

Graham




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Kevin Russell, Accredited Partner

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It doesnt. And the answer is it depends. I dont know why you are digging in over this Graham. We shouldn't be encouraging businesses to take short cuts. Once again I bring you back to first semester accounting and the Entity principle. Now I started my degree in 78 but I'm pretty sure not much has changed.
Wow where is all this leading to seek a an advice of a registered Tax Agent or a lawyer
This is getting our if control here
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Graham Boast, Accredited Partner

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Kevin

I'm not encouraging anything. At the end of each month, the books show a zero balance in the Loan to Directors and a grossed up amount as Directors Fees, PAYG has been paid, super has been paid, workcover has been paid.

Perhaps you need to re-read the posts.  Accounts stated 4 times that the payment was a Directors Fee, and that PAYG and Super was being paid. On three of these occasions, you replied implying (or is that inferring) that they should be paying tax and super,  despite being told the contrary.  On the forth reply, your advice was to "So just put it to his loan account and have him put on an IAS". Does that mean its ok to do this, but you just need to declare via an IAS rather than via PAYG?

I just don't understand your reply.  I understand entirely that the company and the director are separate legal entities, Just show me something, with a reference, that says that a Director cannot authorise an advance to an employee where the advance is recovered in a timely fashion.

To my mind, what they are trying to do is much better than just leaving it to the accountant to sort out at the end of the financial year.  

Graham

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Kevin Russell, Accredited Partner

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Graeme a dictionary could help you with that definition. I already stated the listener infers, the speaker implies. It's not complicated
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David Elliott

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Chandra:  No mate, it's not getting out of control.  It's a healthy debate between professionals who have different points of view.

Graham:  I think I detect a softening of your earlier expressed views.  I anticipate you agree (a) a "once a year fix" is not best practice and (b) you are comfortable with a "monthly fix" being all but best practice.  i.e. You consider a "monthly fix" to be a very practical approach - a view shared by me.  Am I on track?

I may have got it wrong - but I read Accounts first post as indicating that his Director takes a cavalier approach to the matter under debate here - and that his accountant is not far behind. Hence the first paragraph of my earlier post.

We all have to live and work in the real world.  While a "monthly fix" is still not best practice - it is a great advance on the "once a year fix".  At least a monthly fix will keep Accounts nose almost clean - and at the same time keep his Director's nose in reasonable order too.

Kevin:  You say you "think we have an ethical obligation to not countenance poor or shoddy practices".  I put it to you that we have an ethical obligation to point out these practices AND to assist our clients and their staff to move towards best practice.  These are real people we are dealing with.  Accounts may not be in a position to adopt best pracice overnight. Maybe he would lose his job if he went in hard and fast. It takes more strength of character and perseverence to work on getting things right over time - than to issue an ultimatum and perhaps risk losing one's job.  There will always be somebody else to fill the role and be willing to do what they are told!  


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I was not going to coment again after my initial query caused such controversy, but after I read the latest comment from Kevin responding to Avis, I feel I must agree with Kwikbooks who said.."people come to this site for help, not accusations, a lot are totally  new to any of this, and need to be guided in the right direction to the correct way, best practices and reference to the legal requirements if required.". Although I understand Kevin is a long standing and ethical bookkeeper or accountant who tries to elucidate on areas where he is well versed, and who enjoys a robust debate, his comments sometimes border on elitist and dismissive.  I would mainly like to thank Graham for his reply showing a practical example that helped me to negotiate around my problem. I am an employee of a business, as are many on this forum, and as noted, have only as much influence on the running of that business that is allowed by the business owners/directors, so I must use my skills to accommodate what they need for the business whilst advising them on any problems with legality etc. Bookkeepers also look to the business's accountant for guidance as to how they need the books configured as they are doing the taxes etc and to whom we must explain if there are discrepancies or issues. The job of bookkeeping has become much more all-encompassing over time with more bureaucracy, govt reporting, payroll requirements, STP and learning new software, so any help for us all who are basically doing it alone is always welcomed! These days we have to come to forums if we are using any software because there is usually not a decent manual or training other than watching youtube vids, so we spend a lot of time typing in search queries to match our problem. I hope Kevin continues to share his wisdom but tones down his impatience with those who may not have as much experience as he does.
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Kevin Russell, Accredited Partner

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Thanks accounts. I do like to help yes. And I don't see encouraging short cuts as being in that vein. It's easier to get things right once and for all. And any accountant who promotes short cuts usually gives me pause. Just my two penneth.
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Michelle

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Well said accounts,  employees are doing their best to keep their jobs and follow the business owners requests while trying to keep everything correctly treated for tax and accounting standards.    These forums are great because if you purchase Reckon outright and have to pay $4.95/minute is just not acceptable for support.

I also appreciate the example from Graham of how to process directors wages.  
Thank you.    
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Graham Boast, Accredited Partner

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Two penneth Kevin? I see you have now joined the trend to value pricing.

Many Directors are also employees in their business; some are even Managing Directors.  Are you really saying that leave does not accrue to an employee if they are a Director? 

I think your advice in this whole thread has been a little off the mark.  For Pity's sake.....

Graham
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Kevin Russell, Accredited Partner

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I was very clear that leave would be left up to the contract of employment . It would be most unlikely to be covered by an award or the NES. Whats so hard to understand?
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David Elliott

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Good to see Graham & Kevin are at it again!  Always entertaining.  LOL

As to leave accruing on a Director's salary, I can't imagine that even a verbal contract of employment would other than implicitly include generally/widely accepted conventional employment terms and conditions for the subject position - which of course includes leave.  If something other than the norm is wanted, then it's time to reduce the verbal contract to writing.

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Kevin Russell, Accredited Partner

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If the position doesn't fall under within ambit of the FWA there is no norm. Of course there should be a contract.