Recently, the Australian Taxation Office (ATO) has been working hard to correct some common misunderstandings about Division 7A. This part of the law regulates how private companies treat loans to their shareholders (or their family members and associates). Many business owners mistakenly think they can take money from their company as if it’s their own, but the rules around this are much stricter than they might think.
Let’s take a look at some of the myths surrounding Division 7A and clear up the confusion.
What is Division 7A?
Division 7A is a tax rule designed to prevent business owners from taking money out of their company without paying taxes. If you, as a shareholder, borrow money from your company or receive benefits like loans, the company must follow certain rules. If not, the ATO may treat it as a dividend and tax you on it, even if you didn’t take any actual profit from the company.
Myth 1: “The Company’s Money is Yours to Use”
A common myth is that you can just take money from the company whenever you want. However, the ATO has made it clear: the company’s money is not your money. Even though you may have access to company funds, that doesn’t mean you can treat it as your personal cash to spend however you like.
If you take money out of the company—whether it’s in the form of a loan, dividend, or other types of withdrawals—you need to follow the rules. If you borrow money from the company, for example, there needs to be an official loan agreement in place, with an interest rate and a set repayment plan. If you don’t follow the rules, the ATO may consider it a dividend, and you could face extra taxes.
Myth 2: “Division 7A Only Applies to Formal Loans”
Some people think Division 7A only applies to formal loans that are signed and documented. In reality, the ATO looks at all kinds of transactions, even informal ones. If you take money from the company without proper documentation, it could still be treated as a dividend, and you may have to pay tax on it.
For example, if you just take cash from the company with no agreement or record of it, the ATO may consider that an undeclared dividend. To avoid problems, always make sure there’s a formal agreement in place for any loan or financial benefit you take from the company.
Myth 3: “Just Convert Loans Into Dividends”
Another myth is that if you can’t repay a loan to the company, you can simply turn the loan into a dividend. While this might seem like an easy fix, it’s not that simple. Dividends have strict rules, and they must come from the company’s profits. Trying to convert a loan into a dividend can create tax problems if not done correctly.
Loans and dividends are treated differently by the tax office, so you can’t just call a loan a dividend to avoid repaying it. Doing so can result in penalties and interest from the ATO.
The Truth: Follow the Rules to Avoid Problems
The ATO’s message is clear: if you’re taking money out of the company, you must follow the proper rules. Division 7A is there to prevent tax avoidance and ensure everyone is paying their fair share. It’s not just about avoiding penalties—it’s about keeping your business on track and making sure your financial dealings are in order.
How to Stay Compliant
To make sure you’re following Division 7A correctly, here are a few simple steps:
- Make Loans Official: If you borrow money from the company, make sure there’s a written agreement in place. The agreement should include details like the interest rate, repayment plan, and other important terms.
- Repay Loans on Time: Always make sure to repay any loans on time. If you don’t, the ATO might treat the loan as a dividend, which could lead to extra taxes.
- Get Professional Advice: Tax laws can be tricky, so it’s a good idea to talk to a tax expert or accountant. They can help you understand the rules and ensure you’re staying on the right side of the law.
Conclusion
The ATO is trying to clear up the confusion about Division 7A and make sure business owners know the rules. If you take money from your company, make sure you follow the correct procedures. By doing so, you can avoid costly penalties and keep your business financially healthy. Remember: the company’s money is not yours to take without consequences—so always be careful and make sure you’re following the law!
Disclaimer: Any advice on this site is general nature only and has not been tailored to your personal objectives, financial situation and needs. Please seek personal advice prior to acting on this information. Because of that, before acting on the advice, you should consider its appropriateness to you, having regard to your objectives, financial situation or needs.
