Division 7A - The Basis and staying ahead of Division 7A
Division 7A rule is an integrity rule that prevents profits from being provided to shareholders or their associates tax-free.
“A company is a separate legal entity, company money is not your money.”
Division 7A may apply to a loan, payment or other benefit (including the use of a company asset, debt forgiveness) to one of its shareholders or their associates. where it applies the recipient of the loan, payment, or other benefit is deemed to have received an unfranked dividend, that in included in their assessable income.
Some payments and loans from private companies are excluded from been taken to be a deemed dividend, including loans on complying Division 7A terms or assessable payments like salary and wages and dividends.
Division 7A can apply when a company provides loans, payments or other benefits to shareholders or their associates through another entities such as other companies, trusts and individuals including interposed entities.
To stay ahead of Division 7A by the end of the income year (e.g. 30/06/XXXX):
Early in the income year, plan how company money will be assessed (e.g. salary and wages, dividends, complying loan agreement).
Ensure account allocations are correct and substantiated.
Identify any payments (including use of company assets), loans and debt forgiveness to shareholders or their associates.
Make the minimum yearly repayments required for prior year Division 7A loans.
Take any required actions if you plan to offset a company liability to pay dividends, salary and wages or director’s fees to a shareholder against their minimum yearly repayment obligation.
Things need to be done by lodgment date:
To avoid a Division 7A deemed dividend, before the company tax return is due or lodged (whichever comes first):
Payments not repaid or offset by the end of the income year must be converted to a Division 7A complying loan.
Loans must be repaid in full, or put on Division 7A loan with complying terms
Report interest from any Division 7A loans as income for the company.
Deemed dividends must be included in the shareholder or shareholder’s associate’s assessable income.
Plan ahead for next year - how will company money be assessed?
If you have Division 7A issues and need help to stay ahead of this issue, please contact our office to get support and advice. We provide you an proactive approach with Division 7A rule.