The ATO is cracking down on business owners who take money or use company resources for themselves.
It’s common for business owners to utilise company resources for their personal use. The business is often such a part of their life that the line distinguishing ‘the business’ from their life can be blurred.
While there are tax laws preventing individuals from accessing profits or assets of the company in a tax-free manner, mistakes are being made and the Australian Taxation Office (ATO) has had enough. The ATO has launched a new education campaign to raise awareness of these common problems and the serious tax consequences that can arise.
What the tax law requires
Division 7A is a part of tax law designed to address situations where a private company provides benefits to its shareholders or their associates through loans, payments, or debt forgiveness. It also comes into play when a trust allocates income to a private company but doesn’t pay it, while the trust itself provides benefits to the company’s shareholders or their associates.
This regulation was put in place to prevent shareholders from getting access to company profits or assets without paying the proper taxes. If Division 7A is triggered, the benefit received is treated as a deemed unfranked dividend for tax purposes, meaning the recipient will be taxed at their marginal tax rate. To avoid this unfavourable tax outcome, one can:
- Repay the amount before the company’s tax return is due, often through a set-off arrangement involving franked dividends.
- Establish a complying loan agreement between the borrower and the company, ensuring minimum annual repayments at the benchmark interest rate.
The problem areas
Division 7A is not a new area of the tax law; it has existed since 1997. Despite this, common problems are occurring. These include:
- Incorrect accounting for the use of company assets by shareholders and their associates. Often, the amounts are not recognised;
- Loans made without complying with loan agreements;
- Reborrowing from the private company to make repayments on Division 7A loans;
- The wrong interest rate applied to Division 7A loans (there is a set rate that must be used).
Like life, managing the tax consequences of benefits provided to shareholders and their associates can get messy quickly. Avoiding problems can often come down to a few simple steps:
- Don’t pay private expenses from a company account;
- Keep proper records for your company that record and explain all transactions, including payments to and receipts from associated trusts and shareholders and their associates; and
- If the company lends money to shareholders or their associates, make sure it’s based on a written agreement with terms that ensure it’s treated as a complying loan – so the full loan amount isn’t treated as an unfranked dividend.
There are strict deadlines for managing Division 7A problems. For example, if the borrower plans to repay the loan in full or put a complying loan agreement in place, this must be done before the due date and actual lodgement date of the company’s tax return for the year the loan was made.
Need help with your managing your business and personal tax return? Contact our Walker Hill Accounting team today! support@walkerhill.com.au.
