division 7a

Division 7A is an ATO integrity measure to ensure that private companies don't make tax free distributions of profits to shareholders or shareholders' associates in the form of payments, loans and debts forgiven. These rules only apply where the companies have retained profits. Under Division 7A shareholders or associates who receive payments or loans from their private company must include the value of those payments or loans as unfranked dividends in their tax return. As these unfranked dividends will be taxed at the individual's marginal tax rate, this is not a tax-effective strategy.

The options to eliminate Division 7A loan problems include:

  • Have the payments or loans repaid before the date of lodgement of the company's tax return with the ATO.
  • Enter into a written Division 7A loan agreement before the date of lodgement of the company tax return. The Division 7A loan agreement must have a maximum seven-year loan period (if the loan is unsecured) with interest and repayments dictated by the Division 7A legislation. The interest rate is based on the FBT interest rate.
  • Pay directors' fees or wages in the 30th June financials to eliminate the Division 7A loan. The directors' fees will be taxable to the individual, but the company will receive a tax deduction for the payment.
  • Have the director sell assets to the company or take over some of the company's liabilities (must be done at market values).
  • Have the 'bucket' company purchase the operating business from the trust structure.
  • Pay a dividend (ideally franked).