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The ATO has reminded tax professionals about the critical requirements for correctly managing Division 7A loans for their clients.
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Accountants cautioned on ‘unexpected tax consequences’ with Division 7A loans
23 April 2024
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Tax professionals and taxpayers have been warned that failing to correctly manage the requirements of Division 7A loans can result in unexpected tax consequences in a recent ATO update.
“Division 7A can apply to loans, payments or other benefits when an associate or shareholder accesses money from their private company,” the ATO said.
“When not managed correctly, this can result in the transfer of funds being treated as an unfranked dividend and larger than expected tax bills for your clients.”
To avoid these unexpected tax consequences, the ATO said that all payments and loans that haven’t been repaid should be placed on a complying Division 7A loan.
“This agreement must be in place before the company’s tax return lodgment date,” the Tax Office said.
The ATO said a Division 7A complying loan agreement must:
- Be in writing before the company’s tax return lodgment day.
- Have an interest rate for each year of the loan equal to the Division 7A benchmark interest rate.
- Have a maximum term of seven years for an unsecured loan, or 25 years for certain secured loans.
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“The written agreement must also include the identity of the parties, the amount of the loan, the requirement to repay and signatures of the parties, with dates,” the ATO said.
The ATO said it will continue to support tax professionals and their clients to better understand Division 7A and will be issuing further information on the requirements.
The Tax Office plans to release an article focused on the rules for minimum yearly repayments on complying loans as part of its increased educational focus in this area.
Tax professionals and taxpayers have been cautioned that failing to correctly manage the requirements of Division 7A loans can result in unexpected tax consequences in a recent ATO update.
“Division 7A can apply to loans, payments or other benefits when an associate or shareholder accesses money from their private company,” the ATO said.
“When not managed correctly, this can result in the transfer of funds being treated as an unfranked dividend and larger than expected tax bills for your clients.”
It will next release an article focused on the rules for minimum yearly repayments on complying loans as part of its increased educational focus in this area.
Last month, the ATO outlined some of the common mistakes it sees with Division 7A.
This included issues such as incorrect accounting for the use of company assets by shareholders and their associates and loans made without complying with loan agreements.
The ATO warned that reborrowing from the private company to make repayments on Division 7A loans and applying an incorrect benchmark interest rate on a Division 7A loan are other common issues it sees
“Record keeping and forward planning is crucial when shareholders and their associates access private company money or assets,” it said.
“Annual checks are necessary to ensure they're compliant and should confirm:
- Payments or loans are fully repaid or converted to a Division 7A complying loan agreement before the company’s lodgment day
- Minimum yearly repayments are made on complying loans from prior years by the end of the income year.”
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