There's a range of issues and rules for small business and private groups to navigate when accessing money and benefits from their private companies.
Division 7A is an integrity rule that prevents private company profits from being provided to shareholders or their associates tax-free. It does not apply to payments of salary and wages, director fees, fringe benefits or ordinary dividends, but has broad applications to all other payments and benefits. When it applies, the recipient of the loan, payment or other benefit will be deemed to have been paid an unfranked dividend that will be included in their assessable income.
Our recent webinarExternal Link introduces the most common mistakes we see with Division 7A. They are simple in nature and our concern is that fundamental issues continue to be overlooked.
Some of the common issues we see are:
- incorrect accounting for the use of company assets by shareholders and their associates
- loans made without complying loan agreements
- reborrowing from the private company to make repayments on Division 7A loans
- an incorrect benchmark interest rate applied on a Division 7A loan.
Record keeping and forward planning is crucial when shareholders and their associates access private company money or assets. Annual checks are necessary to ensure they're compliant and should confirm:
- payments or loans are fully repaid or converted to a Division 7A complying loan agreement before the company’s lodgment day
- minimum yearly repayments are made on complying loans from prior years by the end of the income year.
Use our Division 7A calculator and decision tool to help you calculate the minimum yearly repayment.
If you identify errors, take corrective action as soon as possible. Don’t assume you’ll be able to rely on the Commissioner's discretion if an unfranked deemed dividend is triggered.
We recommend you bookmark or favourite our private company benefits Division 7A dividends web content, so you can easily access our comprehensive information whenever you need it.
Over the coming months we will be providing more information aimed at helping you understand Division 7A and avoid the common mistakes via the Tax professionals newsletter.