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Problem: Division 7A Mismanagement
Whenever your tax structure involves a company you need to be extremely careful with managing Division 7A exposure.
Common Division 7A Mistakes include:
- Not realising Division 7A issues exist
- Failing to execute loan agreements on time
- Not meeting minimum annual repayments
- Mismanagement of unpaid present entitlements
- Not understanding what distributable surplus is
Solution
Professional Division 7A management
Outcome
Mitigation of severe adverse consequences (Double tax!)
Read Key Points & Transcript
Division 7A
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 several 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.
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