What Are Division 7a Loans? Do They Apply to You?

Let’s begin answering the following questions:

• Are you a shareholder of a private company?
• Have you paid personal bills from your company account?
• Do you owe money to your company?

If you answered yes to any of the above questions, you need to read this article.

Division 7A loans are triggered when a payment or other benefit by a private company is provided to a shareholder or any of its associates.  When this happens, the ATO can treat those payments as an unfranked dividend in the hands of the person who receives the payment and therefore income tax will be payable. If, on the contrary, no action is taken and the rules set under Division 7A loans are ignored, the payment or other benefit is considered as a deemed dividend which is generally unfranked.

A payment or other benefit can include:

• a monetary advance
• provision of credit or other form of financial dispensation
• payment for a shareholder or their associate, on their account, on their behalf, or at their request if there is an obligation to repay the amount
• a transaction in whatever form that is the same as a loan of money

Getting away from Division 7A loans is as simple as:

• Keeping private affairs separate from the business
• Repay or convert a dividend (franked if credits available) by lodgment day.

However, if the amounts cannot be repaid or kept separate, a written loan agreement must be in place.

Generally, Division 7A loans are stablished to a maximum of 7 years to be repaid.

We ask our clients to be careful when drawing money out of the business and ensure loan agreements are complain pursuant the current tax law as the ATO is not offering any leniency towards non-compliant loan agreements.

Give us a call and we can help you