Some of the most common Division 7A errors we see come from incorrect loan payments. You can avoid a costly problem when making Division 7A loan payments by following these tips:
- For loans you've made to shareholders or associates, repay them in full, or convert them to a complying Division 7A loan, by your private company’s lodgment day.
- Ensure your Division 7A loan payments for the income year are at least equal to the required minimum yearly repayment.
- Calculate minimum yearly repayments using the correct benchmark interest rate and pay by 30 June. Our Division 7A calculator and decision tool can help with this.
- Keep sufficient contemporaneous evidence to show what payments you made and when you made them. Journal entries by themselves are not evidence of payments.
- Where you make payments by offsetting a dividend owed to the borrower
- correctly declare the dividend by 30 June
- keep evidence of that occurring.
- Don't borrow money from the same private company to make the payment or make the payment with the intention of reborrowing a similar or larger amount from that same company (including through interposed entity arrangements) – these payments may not be taken into account.
Directions to pay
We're seeing increased errors when companies are directing other entities to make their payments for them.
Remember:
- A direction to pay can be an effective form of payment, but only if the entity making the payment has capacity to pay.
- You must keep contemporaneous evidence that the entity made the payment on your behalf.
Read our example about how to avoid direction to pay errors in our Loans by private companies web content, under the Loan repayments not taken into account section.
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