What Division 7A means
Division 7A contains a series of integrity rules that may apply when a private company attempts to provide money or other benefits to its shareholders or their associates in an income-tax-free manner. Division 7A is one of the top areas we see both small businesses and tax professionals make errors in.
Our focus
Common errors
The most common errors we see are caused by:
- shareholders (owners and associates) not understanding that a company is a separate legal entity and the company's money and assets are not the owners', such as
- using private company assets for private purposes
- using a single bank account (or credit card) for private and company expenses, making it difficult to distinguish between private and business expenditure
- poor or no business records
- not meeting Division 7A requirements when making, repaying and managing loans made to shareholders or their associates.
Errors that arise from loans
We see Division 7A errors arise when private companies make loans to their shareholders or their associates. This includes:
- not entering a written complying loan agreement before the company’s lodgment day
- loan agreements being made between the wrong entities
- private companies charging interest on loans below the benchmark rate
- private companies not declaring interest earnt on Division 7A loans in their assessable income
- the private company using journal entries to record repayments that haven’t been made
- shareholders or their associates not meeting their minimum yearly repayments due to
- not making their repayments by the 30 June deadline
- incorrectly calculating their minimum yearly repayments resulting in them paying less than the required repayment amount to the private company, for example, by applying an interest rate less than the benchmark rate
- borrowing money from the private company to make a minimum yearly repayment.
Example: Logan the carpenter
Logan is a carpenter who is the sole director and shareholder of a private company.
Logan used the company credit card to pay $20,000 towards his children’s school fees and $15,000 for a family holiday.
Logan reasons that he will repay these amounts to the company when the company needs the money. Logan doesn’t repay the money to the company or convert the payments into complying loans before the company’s lodgment day. Due to this, the payments are deemed Division 7A dividends.
Logan must declare both payments as unfranked dividends in his individual tax return. Logan will pay tax on the unfranked dividends at his marginal tax rate. He won’t get a credit for the tax the company has paid on those profits.
Logan lodges his individual tax return. In addition to the pre-fill income information, Logan also declares $35,000 of unfranked dividends. Logan later receives his notice of assessment, which shows he has a tax bill for the 2024 income year.
End of exampleHow to get it right
If you’re using business money or assets for private purposes, we want to make sure you're aware of:
- using business money and assetsExternal Link – we have a free self-paced course on essentials to strengthen your small businessExternal Link
- ATO webinarsExternal Link
You can also contact your tax professional to obtain advice specific to your business needs.