The Australian Taxation Office (ATO) has published a guide aimed at clarifying Division 7A by dispelling common misconceptions.
The ATO explains, the Division 7A is an integrity rule that prevents private company profits from being provided to shareholders or their associates tax-free. It does not apply to payments of salary and wages, director fees, ordinary dividends or certain fringe benefits, but has broad application to other payments, loans and benefits. When Division 7A applies, the recipient of the payment, loan or other benefit will be deemed to have been paid an unfranked dividend that will be included in their assessable income.
According to the ATO most errors we see that result in the application of Division 7A are simple in nature, including:
- not recognising that your company’s money is not your money, and you can’t access it for personal use without tax consequences;
- loans being made without complying loan agreements;
- applying the wrong benchmark interest rate when calculating Division 7A loan repayments.
