Posted on October 26, 2018 by Tom Francis
Division 7A is an area of tax law often mentioned and worried about by accountants and tax advisors, but generally not well understood by business owners. The legislation broadly covers the use of company money by shareholders without first declaring a dividend and was introduced in December 1997. Balances arising before this date are excluded from the measures.
Under the legislation amounts ‘borrowed’ from the company and used by shareholders for private purposes are deemed to be an unfranked dividend. This is obviously undesirable as it increases the taxable income of shareholders and simultaneously denies them the benefit of franking credits that could have accompanied a franked dividend.
Fortunately, the legislation also includes a mechanism whereby borrowed funds can be placed on a complying loan agreement, colloquially referred to as a “Division 7A Loan” or “s109N Loan”. Loans are principal and interest and can be in place for 7, 10 or 25 years.
In December 2009 the impact of the legislation was extended by the ATO to also cover unpaid trust distributions to companies, however these amounts could be placed on more flexible 7 or 10 year interest only loans. Again, balances that arose prior to December 2009 were excluded from the measures.
In both cases we have managed these ‘loans’ for our clients with an emphasis on smoothing and planning income levels each year while still complying with the requirements of the legislation. Generally, this is done through the declaration of dividends each year which are applied against the outstanding balances. This all appears about to change though as the Government flagged in the May budget that they intend to implement changes to Division 7A in line with recommendations from the Taxation Review Board.
The Government are yet to table any legislation on the matter but is expected that the following key changes will be made:
- Interest only loans will no longer be an option, all loans will be principal and interest with repayment benchmarks
- 7 and 25-year loans will no longer be an option and, of most concern,
- Amounts previously excluded as being pre-December 1997 and pre-December 2009 will now be caught by Division 7A
For these reasons we are seeking to proactively manage excluded amounts on our clients’ balance sheets as part of our compliance program in 2018. This approach will be most noticeable for clients with large balances currently excluded by the legislation. We believe that by addressing these issues sooner rather than later we can avoid sudden, large increases in tax that our clients have not planned for.
If you are concerned about your own Division 7A exposure or have friends and family who you believe are not being correctly advised in this area, we encourage you to contact us as soon as possible to discuss the above. For the vast majority of our clients there will be no noticeable change in the strategy for managing your tax affairs.
Posted on by Braden Whelpdale
With the busy tax season in full swing, there is a heightened amount of fraudulent activity targeting Australians. The ATO reported more than 37,000 scam attempts last year during tax time. While many people were alert and didn’t fall for the scams, more than $630,000 was handed over to scammers.
In years gone by, we have seen the following scams.
Phone scam – voicemail
Scammers are leaving voicemail messages threatening the recipients with arrest due to an unknown tax debt or suspected tax evasion. The scammers claim to be from the ATO and may threaten that a warrant for the person’s arrest will be issued if they do not call the scammer back on the phone number provided.
Email scam – tax refund review
Scammers are sending fake ATO emails asking completion of a ‘tax refund review’ form to receive a refund. The form asks for online banking credentials, credit card numbers and limits, and personal address information. Do not click nor save the attachment as it may download malicious malware onto your computer. Do not disclose the personal information the form is requesting.
Phone scam – fake debts & refunds
ATO phone impersonation scams have been widely reported. The scammers may tell you:
- a complaint has been made against you and you are committing tax fraud
- that you have to pay a debt that you know nothing about
- that you may be immediately arrested if you don’t pay the debt straight away
- to pay the debt using unusual methods of payment that the ATO does not use such as iTunes, Bitcoin, store gift cards or pre-paid visa cards
- you are owed a tax refund but you have to provide a personal credit card number for the funds to be deposited into.
This year it seems we are exposed to fake text messages sent by the ‘ATO’ giving people false information about their tax, in particular their refunds. Below is an example of the text messages these scammers are sending to the public:
George received a text message from ‘ATO Refund’ saying there’s a tax refund of $275 for him to claim. All he needed to do was click on the website link and log in with his phone number and the PIN number provided in the message. He was asked to fill in personal details and provide his Tax File Number (TFN) and credit card number (including the 3-digit code from the back of his card) so his refund could be deposited into his account.
Another version of this scams asks people to pay a small fee via their personal debit/credit cards to receive the refund, which leads to the scammers being able to deduct large sums of money from your accounts within days.
The ATO have identified the main components of these scams which include:
- Appears to come from the ATO
- Tell you your eligible for a refund and you need to respond
- Ask you to pay a fee to receive a refund
- Contain hyperlinks that lead to a fake website or a fake login page
- Instruct you to click on a link to submit a form with personal information
- Lead to money being stolen from your credit/debit card account
- Ask for personal information including TFN or credit card details
If you are unsure if you are on the receiving end of a scam, contact your accountant at GeersSullivan and we will contact the ATO on your behalf.