One of the big ones when it comes to Division 7A Mess Ups is underpayment or nonpayment of interest.
Failure to satisfy the conditions of a complying Division 7A loan or a subtrust investment arrangement is considered a breach. Underpayment or nonpayment of interest is such a breach.
Underpayment can occur by using the wrong dates and/or interest rates. Division 7A is quite intricate and oftentimes the applicable date isn’t so easy to work out. It could be 30 June, the date of lodgement of the trust’s tax return, the date of lodgement of the company’s tax return, the tax return due date of the trust or company, or the date of payment/loan. It is imperative to get this date correct.
Furthermore, the correct interest rate must be used. The interest rate can change year to year and a different interest rate can apply depending on whether we are working with a loan, 7 year or 10 year subtrust.
Another consideration when it comes to calculating the interest due is whether or not it’s a standard 365-day year or a 366-day leap-year.
When underpayment or nonpayment happens, what you’re looking at is a potential deemed dividend – quite possibly a lot of tax! You deserve to avoid unnecessary taxes and that’s why it’s so important to manage Division 7A very carefully.
Another potential trap is the fake payout. The ATO have the power to check loan repayments and if they see that a separate loan came about, whether before or after the loan repayment, which likely helped the entity make the loan repayment, then that loan repayment could be effectively disregarded – considered a fake payout which means you might have underpaid and breached Division 7A.
The complexity of Division 7A unfortunately seems to overwhelm many accountants and is a reason people come to us as WA’s GO-TO in fixing disastrous Division 7A errors. Important to note is that the earlier an error is caught the greater the chance we can fix it.
We hope this series on Division 7A Mess Ups proves useful to WA’s amazing business community.
If you’ve encountered any of these issues or are concerned about how your accountant has handled your Division 7A compliance, then give either Mike Beer or Ben Paul a call to obtain the specialist Division 7A help you need.