Division 7A is an anti-avoidance measure that ensures companies can only distribute profits via dividends only.
It applies when a private company made a loan/advance to shareholders or their associates, or forgives a debt owed by the shareholders.
When you see your company clients having "Loans to directors/shareholders" or Director Loan with negative balance, please let Teresa know immediately.
If left unresolved, the company client will be treated by ATO to have paid a "deemed dividend" to the shareholder (who is normally also the director for most of our clients).
Eg: At year end a company's balance sheet has "Loan to Director" $50,000. The director is also the shareholder.
If nothing is done to reduce the balance, the $50,000 will be treated as "deemed dividend" paid to the director.
i.e. the director will need to include $50,000 dividend income (unfranked) in his individual tax return, although he did not receive any money from the company. He will need to pay tax on this $50,000 "income".
To avoid Division 7A deemed dividends, either:
- adjust the account as much as possible to eliminate/show a lower balance in the Loan to Director/Shareholder account; or
- enter into a complying Division 7A loan agreement before the company tax return lodgement due date.
There are 2 types of complying Division 7A loan agreements:
1. An unsecured loan, which has a maximum term of 7 years; or
2. a secured loan, secured by a mortgage over real property (where the market value of the property is at least 110% of the loan amount), which has a maximum term of 25 years.
After entering into the loan agreement, it must be ensured that statutory minimum repayments from the shareholder are made to the company every year. Any failure or shortfall of repayment will be treated as Division 7A deemed dividend again.
|When trust distributes to a company but no cash actually was paid.|
Think of it as putting someone on the payroll, declaring wage figures, but no money had been transferred from the business ac to the staff ac.