5 Points To Avoid Division
7A
Complications
Written by: Hornbill Team
Updated: 01/06/23 Published: 01/06/23
5 Points To Avoid Division
7A
Complications
THESE 5 TIPS
WILL HELP YOU ANSWER!
Written by: Hornbill Team
Updated: 01/06/23 Published: 01/06/23
It’s simple to forget, but the money from your private company actually
belongs to the company, not to you. Division 7A was created as a
countermeasure to private corporations’ tax-free distributions of profits to
shareholders and/or associates.
Division 7A is governed by a variety of complex rules, regulations, and
exemptions, some of which have made it difficult for operators and
consultants to navigate. Further complicating the landscape, the latest
proposed legal revisions are aimed to streamline and clarify the procedure.
Here are our top five Division 7A attention points that we shed light on
when anticipating the adjustments and renewed interest of our clients:
1. Corporate money is not for your personal use.
In a private limited corporation, shareholders would be excused for
believing that the money in the bank account belongs to them, but this is
not the reality. It is important to distinguish that the corporation is a
distinct entity with its own liquidity statements. If you want to access the
firm’s funds, you will unavoidably owe tax on the income you receive (often
at your individual tax rate), but you might also be eligible for a credit
balance for any taxes the company has already paid. However, there is no
way to avoid paying the difference between these two rates, so keep that in
mind as you prepare your taxes.
By law, the corporate money is for corporate use only, and not for your
personal expenditure.
2. Record and Document the process
The ATO is known for being meticulous, and for hampering finicky caution
over small points. So to be on the safer side, it’s a smart business practice to
maintain a paper trail and Division 7A-related concerns ready as there is no
exception. Use the loan agreements and any supporting documentation that
are available. It is standard practice to have the necessary paperwork ready
before the filing deadline for the year that the money is drawn out. Err on
the side of caution and consult your advisors if you’re unsure about the
deadlines or the necessary papers.
Dividends must be timely announced and paid. This process must be
properly documented with the appropriate resolutions and in the accounts
if you intend to make repayments in the form of dividends. Specificity is
essential, so record and document it all if it is applicable.
3. Long-term Prospective
It takes a comprehensive approach and long-term strategy to operate
Division 7A efficiently. Over the period of time, as the number of loans, the
cost may also soar, causing you to wonder about its worth. Naturally, this
will have an impact on your tax rates, and then it’s realised that wise tax
planning is necessary for successful tax practices. Consider these
implications, before you initiate an agreement.
In the current scenarios, a non-secured Division 7A loan can have a
maximum period of seven years. However, regardless of security, the
federal government wants to convert all Division 7A loans to 10-year
maturities. Your tax bill might skyrocket if you have seven years’ worth of
Division 7A loans open at once, each needing the bare minimum in monthly
payments. Naturally, this would compound further over ten-year terms.
4. Timed planning is crucial
June 30 is holy if you want to take money out of your business that might
activate Division 7A. How? Why? If you withdraw money after June 30,
you may be able to postpone taxation for another year. Additionally, paying
off the debt prior to June 30 (or at the very least by the next lodgement
date) may even “switch off” Division 7A. Deadlines urge action, therefore all
necessary documentation and payment obligations must be satisfied to
prevent penalties. Utilizing loan agreements effectively provides a
temporary reprieve from the timing of increased tax liabilities, but a smart
strategy for your current and future Division 7A status will be necessary.
5. Imagine the Bigger Picture
Intelligent people consider the larger picture and visualise how various
components work together to get the desired result. Mortgages, other
obligations, and loans between entities are common among families. These
must be viewed in their entirety. Where do I begin? First, list any bank
loans, credit loans, deductible and non-deductible debts, and overdue
distributions owed by your organisation. When possible, tidy up or
reorganise these components to put them to use. Some items may be able to
be offset or repaid (if properly documented) to possibly lower future
responsibilities. Making the proper decision with this exercise now could
result in significant future rewards.
Details are vital, but every so often, stand back, take in the broader picture,
and remind yourself of why you’re doing what you’re doing.
Disclaimer
The content in this blog is intended solely for informational and
educational purposes. They are not intended to provide professional
financial advice to cater for the needs of your specific business. Consult
with our team, if you require any such assistance
It’s simple to forget, but the money from your private company actually
belongs to the company, not to you. Division 7A was created as a
countermeasure to private corporations’ tax-free distributions of profits to
shareholders and/or associates.
Division 7A is governed by a variety of complex rules, regulations, and
exemptions, some of which have made it difficult for operators and
consultants to navigate. Further complicating the landscape, the latest
proposed legal revisions are aimed to streamline and clarify the procedure.
Here are our top five Division 7A attention points that we shed light on
when anticipating the adjustments and renewed interest of our clients:
1. Corporate money is not for your personal use.
In a private limited corporation, shareholders would be excused for
believing that the money in the bank account belongs to them, but this is
not the reality. It is important to distinguish that the corporation is a
distinct entity with its own liquidity statements. If you want to access the
firm’s funds, you will unavoidably owe tax on the income you receive (often
at your individual tax rate), but you might also be eligible for a credit
balance for any taxes the company has already paid. However, there is no
way to avoid paying the difference between these two rates, so keep that in
mind as you prepare your taxes.
By law, the corporate money is for corporate use only, and not for your
personal expenditure.
2. Record and Document the process
The ATO is known for being meticulous, and for hampering finicky caution
over small points. So to be on the safer side, it’s a smart business practice to
maintain a paper trail and Division 7A-related concerns ready as there is no
exception. Use the loan agreements and any supporting documentation that
are available. It is standard practice to have the necessary paperwork ready
before the filing deadline for the year that the money is drawn out. Err on
the side of caution and consult your advisors if you’re unsure about the
deadlines or the necessary papers.
Dividends must be timely announced and paid. This process must be
properly documented with the appropriate resolutions and in the accounts
if you intend to make repayments in the form of dividends. Specificity is
essential, so record and document it all if it is applicable.
3. Long-term Prospective
It takes a comprehensive approach and long-term strategy to operate
Division 7A efficiently. Over the period of time, as the number of loans, the
cost may also soar, causing you to wonder about its worth. Naturally, this
will have an impact on your tax rates, and then it’s realised that wise tax
planning is necessary for successful tax practices. Consider these
implications, before you initiate an agreement.
In the current scenarios, a non-secured Division 7A loan can have a
maximum period of seven years. However, regardless of security, the
federal government wants to convert all Division 7A loans to 10-year
maturities. Your tax bill might skyrocket if you have seven years’ worth of
Division 7A loans open at once, each needing the bare minimum in monthly
payments. Naturally, this would compound further over ten-year terms.
4. Timed planning is crucial
June 30 is holy if you want to take money out of your business that might
activate Division 7A. How? Why? If you withdraw money after June 30,
you may be able to postpone taxation for another year. Additionally, paying
off the debt prior to June 30 (or at the very least by the next lodgement
date) may even “switch off” Division 7A. Deadlines urge action, therefore all
necessary documentation and payment obligations must be satisfied to
prevent penalties. Utilizing loan agreements effectively provides a
temporary reprieve from the timing of increased tax liabilities, but a smart
strategy for your current and future Division 7A status will be necessary.
5. Imagine the Bigger Picture
Intelligent people consider the larger picture and visualise how various
components work together to get the desired result. Mortgages, other
obligations, and loans between entities are common among families. These
must be viewed in their entirety. Where do I begin? First, list any bank
loans, credit loans, deductible and non-deductible debts, and overdue
distributions owed by your organisation. When possible, tidy up or
reorganise these components to put them to use. Some items may be able to
be offset or repaid (if properly documented) to possibly lower future
responsibilities. Making the proper decision with this exercise now could
result in significant future rewards.
Details are vital, but every so often, stand back, take in the broader picture,
and remind yourself of why you’re doing what you’re doing.
Disclaimer
The content in this blog is intended solely for informational and
educational purposes. They are not intended to provide professional
financial advice to cater for the needs of your specific business. Consult
with our team, if you require any such assistance