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 days 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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Graham Boast, Accredited Partner

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I just noticed that this is was posted in a Reckon One forum.  The screenshot is from Reckon Business, but the principles are the same
Took the words right out of my mouth Graham it is done all the time :)
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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.