Are you worried about making a costly mistake with your company finances? You’re not alone. The ATO has noticed a lot of confusion when it comes to Division 7A of the Income Tax Assessment Act 1936. Getting it wrong can lead to unexpected tax bills, audits, and stress you don’t need. To help you stay on track, the ATO has put together a helpful guide addressing some common myths. Here’s what you need to know:
Myth 1: The tax rules are the same whether I run my business as a sole trader, partnership, trust, or private company.
Reality: Each business structure has its own tax rules and obligations. If you operate through a private company, Division 7A could apply to any payments, loans, or other benefits you (or your associates) receive from the company. These can include payments made by the company, loans from the company, or even debt forgiveness.
Myth 2: If I own a company, I can spend the company’s money however I like.
Reality: A private company is its own legal entity – separate from you, even if you’re the owner or director. Taking money out or using company assets for personal purposes can trigger tax consequences. You can pay yourself a salary, dividends, or director’s fees—but all of these are taxable. If you use company money or assets without proper treatment, Division 7A could apply. For example, Division 7A can apply to payments made by the company, loans to shareholders, or debt forgiveness by the company. It can also apply when you use company assets for private purposes.
Myth 3: Division 7A only affects shareholders.
Reality: Division 7A extends to shareholders and their associates. The definition of an ‘associate’ is broad and can include family members, business partners, trusts, or other companies connected to the shareholder. For instance, if a private company makes a payment to a shareholder’s spouse or lends money to a trust benefiting their children, Division 7A can apply.
Myth 4: I don’t need to keep records when my company makes payments, loans, or provides other benefits.
Reality: Good record-keeping is essential. You’re legally required to keep accurate records of all business transactions. Failing to track payments, loans, or other benefits properly could result in breaches of Division 7A. Without proper records, you may unintentionally breach Division 7A when your private company provides money, loans, or even lets you use company assets.
Myth 5: I can simply record a dividend in the books after the financial year to cover my minimum yearly repayment.
Reality: A journal entry alone won’t cut it. You need proper supporting documentation and must make the dividend declaration and repayment agreement before the end of the income year (usually 30 June). Without this, you could fall short of your minimum yearly repayment obligation on a complying loan. The borrower and the company must agree to the offsets by the end of the income year.
Myth 6: There are no tax issues if I use my company’s money to fund another business or investment.
Reality: It doesn’t matter what the funds are used for – Division 7A can still apply. Any loan made by your private company to you or your associates could have tax implications. Even if the money is funding another business, rental property, or other income-earning activity, Division 7A may still apply.
Myth 7: I can get around Division 7A by channelling payments or loans through other entities.
Reality: Using intermediaries (like trusts, partnerships, or other companies) to funnel payments or loans can still trigger Division 7A. These middle entities, called ‘interposed entities’, won’t shield you from tax obligations. For example, if your company lends money to a trust, which then lends it to you, Division 7A can still apply.
Myth 8: Payments or loans from my private company to a trust won’t trigger Division 7A.
Reality: Division 7A can apply to payments or loans made to trusts. It can also apply to any unpaid trust entitlements owed to the company. If your company is entitled to income from a trust but leaves it unpaid, Division 7A may treat this as a loan.
Myth 9: The interest rate on my complying Division 7A loan is the same every year.
Reality: The benchmark interest rate changes annually. You need to check the rate each year to calculate your minimum repayment correctly. Using the wrong interest rate could mean your repayments fall short, leading to adverse tax consequences.
Myth 10: I can avoid Division 7A by paying back my loan before tax time or using company money to repay it.
Reality: Temporary repayments or repayments made using company funds won’t necessarily work. If you repay a loan but then borrow a similar or larger amount soon after, or if you use company funds to repay the loan, the repayment might not be valid under Division 7A.
Navigating Division 7A can feel overwhelming, but getting it right is crucial to protect your business and avoid unnecessary tax bills. If you’re unsure how these rules apply to you, we’re here to help.
Need expert guidance on Division 7A or other tax matters? Contact our friendly team today – we’ll make sure you stay compliant and stress-free.