It is fairly common for company owners and directors to use company resources for their private benefit. The line between “the business” and their personal lives may get blurred when the firm becomes a vital part of their everyday life.

The Australian Taxation Office (ATO) has had enough of individuals making mistakes and attempting to access company assets or profits tax-free, despite the fact that there are restrictions prohibiting such behaviour. 

The Australian Taxation Office has started a new education campaign to raise awareness of these widespread concerns and the considerable tax ramifications that may arise. 

Things mandated under tax legislation

Division 7A of the tax law covers the granting of loans, payments, or debt forgiveness by a private company to its shareholders or associates. It may also apply in circumstances when a trust has provided a benefit or payment to a shareholder or their associate but has not yet paid the income assigned to a private enterprise.

Dividends and other business assets cannot be accessible by shareholders unless they first pay the relevant tax, which is why Division 7A was implemented. If the benefit is triggered, the beneficiary will be taxed at their marginal tax rate, just as if they had received an unfranked dividend. This unfavourable tax outcome may be avoided by:

– Returning the money back before submitting the business tax return
– Creating a legally enforceable loan agreement between the company and the borrower, which specifies the interest rate and the minimum annual repayment amount. 

The Concerned Areas

The provisions of Division 7A of the Income Tax Code have been in place since 1997. However, a few common issues continue to arise. Here are several examples:

– Loans not made with complying loan agreements

– The repayment of Division 7A debts by reborrowing from the company

– Division 7A loans have improper interest rates.

Just as in real life, the tax implications of shareholder and associate compensation may quickly get convoluted. In many circumstances, all it takes to prevent problems is following these simple steps:

Avoid using company money for personal purposes with a few simple steps:

– Maintain accurate company documentation that describe and explain all interactions, especially those with related trusts, shareholders, and their affiliates;

– To prevent having the whole amount of a loan regarded as an unfranked dividend, all loans provided by the business to shareholders or their associates must be accompanied by a written agreement specifying the terms under which the loan is compliant.

Division 7A concerns must be handled within a certain timeframe. The borrower must take particular actions to ensure that the loan is completely returned or that a compliant loan arrangement is in place by the due date of the company’s tax return for the year in which the loan was made, whichever comes first.

For any questions you may have around Division 7A,  please give us a call on (02) 9957 4033 to discuss further.