Division 7A is a part of the tax law that is designed to discourage shareholders accessing money from their private companies, other than by way of those private companies paying them dividends. Division 7A does this by treating certain payments and loans made by the company to them, or to their associates, as unfranked dividends.
When does it apply
Division 7A can apply when a payment or other benefit provided by a private company to a shareholder or their associate, and it also apply when a private company provides a payment or benefit to a shareholder or associate through another entity.
Associate:
- A spouse, child or relative
- A partner
- A partnership in which the individual is a partner
- A trustee of a trust under which the individual or an associate are beneficiaries (including discretionary objects)
- A company under the control of the individual or an associate.
Mistakes when it comes to Div 7A
There are few common mistakes that people may not be aware of:
- The shareholder or their associate pay for personal expenses from the private company’s bank account without paying it back before the company lodges its income tax return;
- the shareholder or associates interchangeably use personal and business accounts without appropriately recording those transactions;
- they borrow money from the private company without putting a complying loan agreement in place;
- they use the private company’s assets for personal purposes without then reimbursing the company for that usage;
- The shareholders don’t declare money taken from the private company.
Under the Division 7A, the amounts that taken from the company or the value of assets used for personal purposes, that might be treated as an unfranked dividend which is then taxable to the shareholder unless those amounts are appropriately repaid, reimbursed to the company or unless the shareholder puts those amounts on complying loan agreements all before the private company lodges its tax return.
Division 7A is a board topic in taxation, there are thousands of rules that need to pay attention to. If you have further questions, please contact us on 07 5444 1022, or email to info@gpla.com.au.