Division 7A Myths Debunked
Division 7A is a complex area of tax law that can often lead to misunderstandings and mistakes. Below, we debunk some of the most common myths to help you stay compliant and avoid costly errors.
Myth 1: “The tax consequences are the same regardless of my business structure.”
Incorrect. Each business structure—whether a sole trader, partnership, trust, or private company—comes with its own set of tax obligations and consequences. Choosing the right structure is critical to managing your tax responsibilities effectively.
Myth 2: “If I own a company, I can use the company money however I like.”
Partially True. While you can decide how to use company funds, the company’s money is not your personal money. Division 7A ensures there are tax consequences whenever you take money or access other benefits from your private company.
Myth 3: “Division 7A only applies to the shareholders of my private company.”
Incorrect. Division 7A applies not only to shareholders but also to their associates, which may include family members or related entities.
Record Keeping Myths
Myth 4: “I don’t need to keep records when my private company makes payments, loans, or provides other benefits.”
Incorrect. Businesses are legally required to maintain records of all transactions relating to their tax affairs. Proper documentation is essential for Division 7A compliance.
Myth 5: “I can record a dividend in a journal entry after the income year has ended to offset my minimum yearly repayment obligation.”
Partially True. While a journal entry may be used, it must be supported by contemporaneous action and other evidence to effectively offset a minimum yearly repayment on a complying loan.
Payments to Other Entities
Myth 6: “There are no tax consequences if I use my private company’s money to fund another business or income-earning activity.”
Incorrect. Division 7A may apply to any loan a private company makes (directly or indirectly) to its shareholders or their associates.
Myth 7: “I can avoid Division 7A by making payments or loans through other entities.”
Incorrect. Division 7A applies to arrangements involving interposed entities, where the private company’s shareholder or associate is the ultimate beneficiary. Interposed entities can include individuals, companies, partnerships, or trusts.
Myth 8: “Division 7A doesn’t apply to payments or loans made to trusts.”
Incorrect. Division 7A may apply to payments or loans from private companies to trusts, as well as to trust entitlements of private company beneficiaries.
Division 7A Interest Rate
Myth 9: “The interest rate for calculating my minimum yearly repayment is the same every year.”
Incorrect. The benchmark interest rate for Division 7A loans changes annually. You need to use the correct rate for each income year when calculating your minimum yearly repayment.
Attempts to Circumvent Division 7A
Myth 10: “I can avoid Division 7A by temporarily repaying my loan before the company’s lodgment day or using the company’s money to make repayments.”
Incorrect. Repayments may not be recognized if you reborrow similar or larger amounts after making the repayment or use company funds for the repayment.
Myth 11: “If the company’s liabilities exceed its assets, the net assets amount in the distributable surplus calculation will be negative.”
Incorrect. The net assets amount will be zero if liabilities exceed assets; it cannot be negative for Division 7A purposes.
The Commissioner’s Discretion
Myth 12: “If I trigger a Division 7A deemed dividend, the Commissioner will exercise discretion in my favour.”
Highly Unlikely. The Commissioner is not obligated to exercise discretion to disregard a Division 7A deemed dividend. Each case is assessed on its merits.
Myth 13: “The Commissioner will exercise discretion because I relied on advice from a tax professional.”
Unlikely. The Commissioner’s discretion under section 109RB requires that the tax professional’s actions contributed to the breach and that your reliance on their advice was reasonable.
Key Takeaway
Division 7A is not an area to take lightly. Missteps can result in significant tax consequences, including deemed dividends and penalties.
Ensure you understand your obligations and consult your tax agent if you’re ever in doubt.
