Division 7A is an integrity rule that prevents private company profits from being provided to shareholders or their associates tax-free. It does not apply to payments of salary and wages, director fees, fringe benefits or ordinary dividends, but has broad applications to all other payments and benefits. When it applies, the recipient of the loan, payment or other benefit will be deemed to have been paid an unfranked dividend that will be included in their assessable income.
The most common mistakes that the Australian Taxation Office (ATO) see with Division 7A are simple in nature and they are concerned that the fundamental issues continue to be overlooked.
Some of the common issues are:
- incorrect accounting for the use of company assets by shareholders and their associates.
- loans made without complying loan agreements.
- reborrowing from the private company to make repayments on Division 7A loans.
- an incorrect benchmark interest rate applied on a Division 7A loan.
Record keeping and forward planning are crucial when shareholders and their associates access private company money or assets. Annual checks are necessary to ensure they are compliant and should confirm:
- payments or loans are fully repaid or converted to a Division 7A complying loan agreement before the company’s lodgment day.
- minimum yearly repayments are made on complying loans from prior years by the end of the income year.
If you identify errors, take corrective action as soon as possible. Don’t assume you’ll be able to rely on the Commissioner's discretion if an unfranked deemed dividend is triggered.