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Accountants have been urged to be careful when it comes to complying with rules governing the payment of a dividend by journal entry for Division 7A loans.
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Practitioners warned over Div 7A journal entry practices
30 January 2020
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Speaking to Accountants Daily, TaxBanter senior tax trainer Robyn Jacobson said the use of journal entries to make Division 7A loan repayments via a dividend has brought to light a number of practices that might not be fully compliant with the law.
When it comes to making annual minimum yearly repayments for Division 7A loans, SMEs often look to dividends to make repayments, commonly paid using a journal entry rather than a cash payment.
“It is apparent that some practitioners may not fully understand the various rules governing the payment of a dividend by journal,” Ms Jacobson said.
According to Ms Jacobson, the use of a journal entry to pay a dividend is subject to a number of rules across the Corporations Act, the tax law and Tax Agent Services Act 2009.
This includes how the dividend must be duly declared by 30 June by the directors of the company, in accordance with the company constitution to an eligible shareholder.
The decision to declare a dividend must also be reflected in a directors’ minute or resolution which must be filed in the corporate register within one month of the meeting.
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Further, the company must give a distribution statement to the shareholder within four months of year-end.
Ms Jacobson noted that while the journal entry to record the payment of the dividend can be dated when it is posted, it is fraudulent to backdate the dividend documentation, potentially leaving practitioners open to breaching section 30-10 of the Tax Agent Services Act 2009.
Lastly, Ms Jacobson said a journal entry only amounts to a payment where the principle of mutual set-off applies, for example, when the company’s obligation owed to the shareholder is applied against their obligation to make the minimum yearly repayment.
“Where there is no obligation owed by the company to the shareholder, i.e. because no dividend was actually declared by 30 June creating the company’s indebtedness to the shareholder, the journal entry is ineffective from a Div 7A perspective,” Ms Jacobson said.
“This will result in a shortfall and a deemed unfranked dividend.”
Ms Jacobson believes that while there has been a renewed focus in the last 10 years on getting trustee resolutions done by 30 June, there should be equal regard to declarations of dividends.
“Accountants will sometimes suggest that the amount of the dividend is unknown at 30 June so the documentation can’t be prepared by the required dates. But in the case that the dividend is being used to make a minimum yearly repayment in respect of a loan made in a previous income year, the amount of the minimum yearly repayment will be known well in advance, so there is no excuse,” she said.
“It would be a relatively straightforward exercise for the ATO to check whether this is being done correctly.”
Ms Jacobson’s comments come after former ATO technical director Vincent Licciardi said there was “widespread misunderstanding” across the accounting industry about what journal entries are and how they are used.
“I think a lot of accountants just think that accounting entries and journalising are just a remedy for every problem, and all that does is get their client into strife,” Mr Licciardi said earlier.
“Bear in mind, the journal entry is only a record of the transaction that has already occurred, it is not the transaction itself — that’s the key issue.”
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