Understanding Division 7A – avoid common errors
There are multiple ways in which owners may access private company money, such as through salary and wages, dividends or complying Division 7A loans. Division 7A is an area where the ATO sees many errors, across both the basics and more complex aspects.
Broadly, under Division 7A, certain loans and payments by private companies to shareholders (and associates of those shareholders) are taken to be unfranked dividends. An unpaid present entitlement may also be taken to be an unfranked dividend. A loan will not be taken to be an unfranked dividend if it meets certain minimum rate and maximum term criteria.
The ATO has reminded taxpayers that they need to:
- keep adequate records;
- properly account for and report payments and use of company assets by shareholders and associates; and
- comply with rules around Division 7A loans.
It’s essential that you understand Division 7A to:
- make informed decisions when receiving private company money and using private company assets;
- avoid unexpected and undesirable tax consequences.