Division 7A

Posted on 12th September 2014 by Ashley Dawson

Division 7A prevents private companies from making tax-free distributions of profits to shareholders or to their associates. Tax-Free distributions can be in the form of advances, loans and other payments or credits to shareholders or their associates.

It is important to be aware that if a loan arises in the company it must be dealt with prior to the lodgement date of the following year’s income tax return. These loans can be dealt with as follows:

1. The total amount of the loan can be paid in full either by paying the amount of money back to the company, or by declaring a dividend for the amount of the loan balance to be shown as income in the tax return of the shareholder.  Preferably fully franked subject to availability of franking credits; or
2. Enter into a complying Division 7A loan agreement and make the minimum yearly repayment which can be made by either paying the money back to the company or by declaring a dividend as per above.  For the loan to be “complying” the interest rate must equal or exceed the ATO’s benchmark rate and the term of the loan must not exceed 7 years.  For the 2014/15 financial year the interest rate is 5.95%.

It is often easy to forget that a company is a separate legal entity to its owners and that by taking funds for personal use and not treating as wages or dividends can cause issues.  If you do wish to access funds, please call our office before proceeding and we can advise on the best way to record these for you.