Division 7A can apply to loans, payments or other benefits when an associate or shareholder accesses money from their private company. When not managed correctly, this can result in the transfer of funds being treated as an unfranked dividend and larger than expected tax bills for your clients.
To avoid these unexpected tax consequences, place all payments and loans that haven't been repaid on a complying Division 7A loan. This agreement must be in place before the company’s tax return lodgment date.
A Division 7A complying loan agreement must:
- be in writing before the company's tax return lodgment day
- have an interest rate for each year of the loan at least equal to the Division 7A benchmark interest rate
- have a maximum term of 7 years for an unsecured loan, or 25 years for certain secured loans.
The following details should also be documented:
- the identity of the parties
- the amount of the loan or amounts covered by the loan agreement
- the requirement to repay
- the agreement signed and dated by the parties.
We’ll continue to support you and your clients to better understand Division 7A. In the next article, we'll focus on the rules for minimum yearly repayments on complying loans. We discussed the most common mistakes we’re seeing and how you can avoid them in the previous article and our February webinarExternal Link.
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