Division 7A: 4 common errors


Despite it having been in place for more than 15 years, Division 7A continues to be a high risk area and the Australian Taxation Office (ATO) regularly monitors. Division 7A is part of the Tax Act and it provides provisions to prevent private company owners from avoiding dividend taxation through accessing company profits in other ways other than dividends.

While it has undergone amendments over the years it is an extremely complicated area of taxation. It affects any privately owned company and therefore company shareholders and associates should be very alert to the application of Division 7A. It can apply to to amounts paid by the company to a shareholder or their associates, and can include transfers of property for an amount less than if it has been sold on the open market. It also includes loans by the company to the shareholder or associate which is not repaid in full by the date when the company lodges its tax return. It also covers debts forgiven which were owed by a shareholder or their associate that the company forgives.

4 common errors when dealing with Division 7A

Here are 4 common errors that companies make when dealing with division 7A.

1A loan to a trust can be subject to Division 7A

While Division 7A focuses on private companies it can also affect trusts. Where there are unpaid entitlements owing to a private company beneficiary and the trust allows them to access the 30% company tax rate. A Division 7A may be triggered when the trust makes a payment, loan or debt forgiveness and the unpaid entitlement is not paid out by the time the trust lodges its tax return for the financial years when the payment loan or debt forgiveness was applicable. The effect is that the payment, loan or debt forgiveness is considered a dividend and therefore Division 7A can be triggered.

2Repayments made from new loans

A loan from the private company needs to be properly documented under a complying Division 7A loan agreement. There is then a need for ongoing vigilance and monitoring to ensure that the statutory minimum repayments are made. There is anti-avoidance provisions in Division 7A that prevents recycling of loans, that is for example borrowing a new loan from the company to repay the old loan. Where this occurs the old loan repayment will be disregarded and therefore will be considered unpaid.

A common way of ensuring that the loan is repaid is to pay the shareholder a dividend prior to the tax return lodgement and then use that payment to repay the loan.

3Court orders not protected

Where the Family Court orders that a company transfer company property to a shareholder or to the ex-partner of a shareholder these are still considered payments and therefore a dividend. These payments are not protected from Division 7A and need to be considered dividend payments.

4Bad advice

Often issues can arise due to well intentioned advice from a non authorised advisor. For example real estate executors or lawyers who aren’t aware of the Division 7A requirements. We recommend speaking to one of our tax professionals early before the damage is already done to help you put actions in place that will prevent the trigger of a Division 7A.

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About Author

Tanya Moran
Tanya Moran

Tanya Moran is a Senior Partner and the Lead Taxation Partner of Azure Group. She has more than 20 years' experience working with a large array of businesses from small accounting firms to large international corporations.

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