Your clients can avoid an unfranked dividend under Division 7A by ensuring loans from a private company to its shareholders or their associates are repaid in full or placed on a Division 7A complying loan agreement before the company’s lodgment day.
Recently, we discussed how minimum yearly repayments (MYRs) must be made towards complying loans by the end of the income year, starting from the income year after the loan is made.
But did you know loan repayments can be made by offsetting the borrower’s entitlement to an amount owed to them from the private company? For example, your clients can offset the MYR against dividends, salary, wages and directors' fees.
How to keep records of offset amounts
A common issue we see is the use of journal entries to offset MYRs without supporting evidence.
The company and the borrower must owe each other the amounts at the time the offsets are made. For instance, if offsetting the MYR with a dividend, there must be a record, like meeting minutes, showing that the shareholder is entitled to that dividend at the time of the offset.
There must also be an agreement between the borrower and the company to offset the MYR against the amount payable to the borrower.
To be effective in making the MYR, the agreement and the offsets must be made by the end of the income year (usually 30 June).
If the offset isn't effective, the MYR may not be paid by the end of the income year. This can result in a shortfall in the MYR, which could be assessed to the borrower as an unfranked dividend.
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