Deal with a Division 7A loan from your company
We will put your loan account on complying terms before it becomes an unfranked dividend.Money taken out of a private company by a shareholder is not automatically income, and it is not automatically a loan either. Division 7A decides which. Where an amount is not repaid or placed on complying terms by the company’s lodgement day, it can be treated as an unfranked dividend. That falls on the person who took the money, and unfranked means no credit for the tax the company already paid. The provisions sit in the Income Tax Assessment Act 1936 (Cth) (the 1936 Act).
The deadline dealt with, not missed
The company's lodgement day is what decides whether the amount becomes an unfranked dividend.
An arrangement that maintains itself
Minimum repayments are calculated and scheduled, so a complying loan does not quietly stop complying.
Relief pursued where it is available
Where a deemed dividend arose from an honest mistake, relief can sometimes be obtained by application.
What is Division 7A, and why does it catch ordinary transactions?
Division 7A treats certain payments, loans and forgiven debts from a private company to a shareholder or their associate as dividends. It exists because profits taxed at the company rate would otherwise reach shareholders untaxed simply by being lent to them. The rules catch ordinary arrangements rather than aggressive ones. A drawing recorded against a loan account, a company paying a private expense, or an old balance nobody has looked at are all within scope.
What actually triggers Division 7A?
A payment, a loan or a forgiven debt from a private company to a shareholder or an associate. It does not require any intention to avoid tax. A drawing recorded against a loan account, or a company paying a private expense, is enough to bring it into play.
What happens if we miss the deadline?
The amount can be treated as an unfranked dividend for that year, assessed to the shareholder at their marginal rate. Because it is unfranked, there is no credit for tax the company already paid. Relief is sometimes available where the failure was honest, but it has to be applied for.
Is a complying loan agreement enough on its own?
No. It has to meet requirements on the term and the interest rate, and a minimum repayment has to be made every year afterwards. Missing a minimum repayment creates a deemed dividend for that year. The agreement is the start of the obligation, not the end of it.
Should we just repay the loan instead?
Often, yes. Repaying before lodgement day removes the problem without the ongoing administration a complying agreement requires. It depends on whether the cash is available and where it would come from. We will price both and tell you which is better.
Deal with the loan account before lodgement day
Send us the loan account balance and the company’s last accounts. We will tell you what has to happen before lodgement day, and what it costs.
A loan account is a deadline, not a balance
There is a loan account in the company’s books with your name against it. It has probably been there for some time, and it has probably grown. What has not happened is anyone putting it on complying terms, or working out what happens if they do not. The deadline is the company’s lodgement day, and it passes quietly every year.
- We will work out what is actually in the loan account, and from which years.
- We will tell you whether a deemed dividend has already arisen, and for how much.
- We will prepare a complying loan agreement that meets the term and interest requirements.
- We will calculate the minimum yearly repayment and set up a way to track it.
- We will apply for relief where a deemed dividend arose from an honest mistake.
There is a loan account in the books and nobody has dealt with it
You run a company you own, and over the years money has moved between you and it as circumstances required. Your accountant records the drawings against a loan account. Somebody may have mentioned Division 7A at some point. The balance has grown, the years have accumulated, and nothing has been signed. You want to know how exposed you are and what fixing it looks like.
What's included in your Division 7A advice
- Analysis of the loan account by year and by character.
- Assessment of any deemed dividend already arising.
- A complying loan agreement meeting the statutory requirements.
- Minimum yearly repayment calculation and a schedule to maintain it.
- An application for relief where the failure was honest.
- A comparison of repaying against documenting, with the cost of each.
How a bookkeeping entry becomes a tax bill
Division 7A problems are almost never the result of a decision. They are the result of a series of entries nobody treated as significant.
The mechanism is unforgiving. If the amount is not repaid or put under a complying loan agreement by lodgement day, it is a deemed dividend. It is unfranked, so the shareholder pays at their marginal rate. There is no credit for the tax the company already paid on the same profit, so the same money is taxed twice.
Complying agreements have their own requirements after that. There is a maximum term, a minimum interest rate set each year, and a minimum repayment that has to be made every year. Miss a minimum repayment and a deemed dividend arises for that year instead. This is why the problem tends to repeat. An arrangement put in place once and then not maintained produces a new liability each year.
From an open loan account to an arrangement that holds
We start by working out what is actually there. Loan accounts often contain amounts from different years on different footings, and some may not be loans at all for these purposes.
Then we deal with the exposure. Where the deadline has not passed, the options are repayment, a complying loan agreement, or a combination. We will tell you what each costs in cash and in tax. Where a deemed dividend has already arisen, relief is sometimes available if the failure was honest, and applying for it is worth doing properly. After that we set the arrangement up so it maintains itself, with the minimum repayment calculated and diarised each year.
How we resolve a Division 7A exposure
Work out what is really in the account, then fix it before lodgement day.Open the account
We work out what is actually in the loan account, from which years, and on what footing.
Fix the exposure
We repay, document or combine the two, and apply for relief where a dividend has already arisen.
Keep it complying
We calculate the minimum yearly repayment, and set up the schedule that keeps the agreement on foot.
The loan account resolved before it becomes a dividend
Almost nobody creates a Division 7A problem deliberately. It comes from using your own company’s money for ordinary things and letting the paperwork follow later.
One of our lawyers is a Chartered Tax Advisor with The Tax Institute and has held that credential for 25 years. We are also recognised in Doyle’s Guide for tax law. We deal with loan accounts that have been running for years, and put complying agreements in place. We also apply for relief where a deemed dividend has already arisen. We will tell you plainly when repaying is cheaper than documenting, because it often is.
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Fix the loan account before lodgement day
Send us the loan account balance and the company’s accounts. We will tell you what has to happen before lodgement day, what it costs, and how to keep it complying.
More on this area of law
Read more about Division 7A, shareholder loans and private company distributions, and how ADLV Law can help.
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