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Division 7A
Are you concerned that loans or financial arrangements involving your private company could inadvertently trigger Division 7A and lead to unexpected tax liabilities (double tax!)?
Perth Accountants Professionally Solving Division 7A Issues – Simple & Novel Solutions
At Munro’s, our specialist Division 7A accountants understand that navigating Division 7A regulations can be complex and stressful. It’s our role to ensure that business owners in Perth and across Western Australia don’t have to worry that non-compliance could result in deemed dividends and significant tax penalties – risks that may threaten your hard-earned wealth.
The Problem:
Division 7A is designed to prevent private companies from distributing profits to shareholders in the form of loans or other payments without appropriate tax treatment. If not managed correctly, even well-intentioned financial arrangements can be reclassified by the ATO as unfranked dividends, increasing your tax burden and disrupting cash flow.
Our Solution:
We take a proactive, problem–solution approach to Division 7A compliance. Our specialist team assesses your company’s financial arrangements, identifies potential risks and implements experienced and clever strategies to ensure you remain fully compliant. Our tailored advice not only mitigates tax risks but also enhances your overall business structure—helping you preserve cash flow and safeguard your wealth. By clearly outlining the steps you need to take, we empower you to focus on what matters most: growing your business.
Key Benefits:
- Reduced Tax Risks: Our transparent, no–nonsense approach ensures that your financial practices are aligned with Division 7A requirements, minimising the chance of unexpected tax liabilities.
- Enhanced Cash Flow: By preventing the reclassification of loans as deemed dividends, we help you maintain a healthy cash flow to support ongoing business growth.
- Peace of Mind: With Munro’s by your side, you can rest assured that your compliance strategies are current, robust, top-class and tailored to your business needs.
Clever, Novel, Compliant Solutions
We don’t just use standard ways to solve issues. Where available, we use mostly unheard of – compliant – solutions to solve some of the most challenging Division 7A issues.
If your business group invests in property, you must talk to us about this!
Read Key Points & Transcript
Fixing Division 7A Problems
video key points
- Division 7A rules prevent private companies from providing tax-free benefits to shareholders or associates through loans, payments, or asset use.
- A Division 7A issue arises from transactions like loans without agreements, payment of private expenses, debt forgiveness, undercharged asset use, and unpaid trust distributions to companies.
- Triggering Division 7A results in deemed dividends, leading to double taxation: corporate tax without franking credits and individual tax on unfranked dividends at the recipient’s marginal rate.
- Preventing Division 7A deemed dividends involves purchasing investments via companies, establishing compliant loan agreements, and/or understanding the company’s distributable surplus to cap deemed dividends.
- To navigate and manage Division 7A exposures effectively, seeking professional advice ensures compliance and optimises tax positions.
Presented by: Saul Segal
video transcript
Is your company thinking about lending money to a shareholder or associate, or forgiving a loan it provided to a shareholder or associate in the past? If so, these arrangements might be captured under the Division 7A framework.
Division 7A consists of rules that private companies must follow when they lend money to their shareholders or associates. Its purpose is to stop private companies from providing tax-free benefits to their shareholders or associates.
When does a Division 7A issue arise?
A Division 7A issues arises when a payment or loan is made from a private company to one of its shareholders or associates.
Some examples of the typical types of transactions that may attract Division 7A are as follows:
- Loans or advances given to shareholders or their associates without a loan agreement.
- Payment of private expenses from the company’s bank account.
- When a private company forgives a debt owed by a shareholder or their associate.
- Providing use of company assets for less than their market value.
- Unpaid entitlements – This is where a company is entitled to receive a distribution from a family trust, but the actual payment is not made to the company, and the funds remain with the trust or are used by the trust, shareholders or their associates.
What happens if Division 7A is triggered?
Where Division 7A is triggered, the shareholder or associate who receives the payment, loan or forgiveness may be deemed to have received a dividend, potentially up to that specific amount.
This deemed dividend would be unfranked, which means that the shareholder or associate would essentially pay double taxation on company’s profits.
The double taxation happens because the company initially pays the tax on the profits earned within the company without the shareholder or associate receiving any franking credits for these payments.
The deemed dividend is then recognised in the shareholder or associates income tax return as an unfranked dividend and tax is paid on this amount at the shareholder’s or associate’s individual marginal tax rate.
Ways to prevent triggering a Division 7A deemed dividend?
These are some of the ways to prevent triggering a Division 7A deemed dividend:
- Consider purchasing investments through a company, because company to company loans are not subject to Division 7A.
- Put in place a complying Division 7A loan agreement.
- Calculating the company’s distributable surplus.
The deemed dividend under Division 7A is capped by the company’s “distributable surplus”.
Are you interested in learning more about the strategies and requirements to properly manage your Division 7A loans?
Then please contact us today to learn more about how we can help you effectively manage your Division 7A exposures.
Division 7A Mess Up Series
Over the years we’ve had many people approach us for help with Division 7A due to errors made in the past.
As specialists in fixing disastrous Division 7A errors, we thought it prudent to publish this series on some of the most common Division 7A Mess Ups.
- Part One: Don’t touch those pre-09 UPEs or pre-97 Loans & the Debt Forgiveness Error
- Part Two: The All-Too-Often Overlooked Hurdle with Division 7A Sub-trusts
- Part Three: Division 7A and Private Use of Property & Luxury Goods
- Part Four: Underpayment or Nonpayment of Subtrust & Division 7A Interest – Wrong Dates, Interest Rates & Fake Payouts
If you’ve encountered any of these issues or are concerned about how your accountant has handled your Division 7A compliance, then please contact us to obtain the specialist Division 7A help you need.
Frequently Asked Questions for Division 7A Accounting
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What is Division 7A and why is it important for my business?
Division 7A is a provision in the Income Tax Assessment Act designed to prevent private companies (those run by small, medium and mid-market businesses) from making tax-free distributions to shareholders and related family members through loans or payments. It’s important because non-compliance can result in these amounts being treated as unfranked dividends, leading to unexpected tax liabilities – double tax! -
What are the common challenges associated with Division 7A?
Common issues include misclassification of financial arrangements, unexpected tax penalties, complex administrative requirements and the potential for cash flow problems. Our specialist service is designed to identify and resolve these issues. -
How do your Division 7A planning services help minimise tax risks?
We conduct a thorough review of your company’s financial practices, implement clear, actionable strategies, and ensure that all loans and payments comply with ATO requirements. Our process helps you avoid the risk of deemed dividends and their associated tax implications. -
Are your Division 7A strategies applicable Australia-wide?
While Munro’s is based in Perth, we’re happy to use our specialist Division 7A accounting skills to help businesses located elsewhere in WA and throughout Australia. -
How responsive is Munro’s when it comes to Division 7A queries?
We’ll respond within a business day of your enquiry and work diligently thereafter to solve your issues should you choose to work with us. Our clients frequently highlight our responsiveness and proactive approach, which you can confirm by reading some of the 100+ 5 star reviews we’ve received over the years. -
Do you assist with restructuring loans to avoid Division 7A issues?
Yes – we review your current arrangements and can help restructure loans to ensure they meet Division 7A requirements, thereby protecting your business from unexpected tax liabilities. -
What is the price for your Division 7A compliance service?
Our pricing is transparent and reflects the complexity of your needs. Please refer to our pricing page and then contact us for a personalised quote.
Where To Begin
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$4,000 (excl. GST)
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