Business structure
The tax consequences are the same if I operate my business as a sole trader, partnership, trust or private company.
Each type of business structure comes with its own set of rules and key tax obligations.
If you run your business through a private company, Division 7A may apply to payments and other benefits provided by your company to its shareholders and their associates. For more information, see Entities and taxpayers affected.
If I own a company, I can use the company money any way I like.
A company is a separate legal entity. It's separate to you, even if you are a shareholder or a director or both. This means the company’s money is not your money, and there will be consequences every time you take money or access other benefits from your private company.
You can access private company money in the form of salary and wages, directors fees or dividends. All of these amounts will be included in the recipient’s assessable income. Private companies may also provide fringe benefits to its employees, including directors.
Division 7A may apply to private use of assets or money from your private company in a way not described, for example as:
- payments by private companies (including use of assets)
- loans by private companies
- debt forgiveness by private companies.
Division 7A only applies to the shareholders of my private company.
Division 7A applies to both shareholders and associates of shareholders. The definition of an associate is broad and depends on what type of entity the shareholder is. For example, for individual shareholders, an associate can include their relatives, spouse, children, a company they control (or their associate controls) or a trustee of a trust that they (or their associate) can benefit from.
Record keeping
I don't need to keep records when my private company makes payments, loans, or provides other benefits to other entities.
You are legally required to keep records of all transactions relating to your tax affairs when you are running a business. You should adopt good record-keeping practices to ensure you identify and account for all payments, loans and other benefits correctly. Failing to do so can result in unintended consequences, including breaching Division 7A.
For more information, see Overview of record-keeping rules for business and the Australian Securities & Investments Commission (ASIC) website for guidance on Company officeholder dutiesOpens in a new window.
I can record a dividend in a journal entry, after an income year has ended, and use that to effectively offset my minimum yearly repayment obligation for that income year.
A journal entry, without other supporting evidence and contemporaneous action, won't be effective to offset a minimum yearly repayment obligation on a complying loan.
The dividend and minimum yearly repayment obligations must exist at the time of the offset and the borrower and the company must have agreed to the offsets. The agreement and offsets must be made by the end of the income year, usually 30 June.
For more information, see Payments always taken into account.
Payments to other entities
There are no tax consequences if I use my private company’s money to fund another business or income earning activity.
Division 7A may apply to any loan a private company makes (directly or indirectly) to its shareholders or their associates. Division 7A may apply regardless of what the loan recipient uses the amounts for, including for any taxable purpose.
Division 7A may apply where a shareholder or their associate use a private company’s assets for private purposes. For more information see Private use of assets.
I can avoid Division 7A by making payments or loans to shareholders and their associates through other entities.
Division 7A may apply to payments or loans made from a private company through other entities, where the private company’s shareholder or their associate is the target entity to whom the payment or loan is ultimately directed. The other entities involved in this type of arrangement are called interposed entities. For Division 7A purposes, an interposed entity can be an individual, company, partnership or trust.
Division 7A won’t apply to payments or loans my private company makes to trusts.
Division 7A may apply to payments or loans made from private companies to trusts. Division 7A may also apply to trust entitlements of private company beneficiaries.
Division 7A interest rate
The interest rate I use to calculate my minimum yearly repayment on my complying Division 7A loan is the same every year.
You need to calculate your minimum yearly repayment for each income year using the benchmark interest rate for that particular income year. The benchmark interest rate generally changes each year.
You can use the ATO's Division 7A calculator and decision tool to help you calculate your minimum yearly loan repayment.
Attempts to circumvent Division 7A
I can avoid Division 7A by:
- temporarily repaying my loan before the private company’s lodgment day
- using the company’s money to make my repayments.
A repayment you make on a loan by a private company may not be taken into account if you reborrow similar or larger amounts from the company after making the repayment, or you use money borrowed from the company to make the repayment. For information about loan repayments not taken into account, see Amalgamated loans.
The net assets amount in the distributable surplus calculation will be a negative amount if the company’s liabilities exceed its assets.
Net assets, in the distributable surplus calculation, means the amount (if any) by which the company’s assets exceed its present legal obligations and certain provisions. The net assets will be zero if the company’s net assets don't exceed these amounts.
The Commissioner's discretion
If I trigger a Division 7A deemed dividend, the Commissioner will exercise a discretion in my favour to disregard it.
You can't assume the Commissioner will exercise a discretion in your favour if you trigger a Division 7A deemed dividend.
There are various discretions available to the Commissioner for Division 7A purposes. For the Commissioner to exercise a discretion in your favour, you must meet certain conditions, and your circumstances must support the exercise of the discretion.
The Commissioner will exercise the section 109RB discretion in my favour because I relied on advice from a tax professional.
Whether the Commissioner will exercise the discretion under section 109RB where you have relied on advice from your tax professional will depend on your individual circumstances.
The actions of the tax professional must have contributed to the breach, and your reliance on their advice must have been reasonable. Relevant factors would include the disclosures you made to your adviser, the nature of their advice and whether the adviser made an honest mistake or inadvertent omission.
It will be difficult to demonstrate that you have reasonably relied upon professional advice for Division 7A purposes where no Division 7A advice is obtained or where your adviser has not turned their mind to the application of Division 7A to your circumstances.