ATO debunks Division 7A ‘myths’
Division 7A of the tax legislation is intended to prevent profits or assets being provided to shareholders or their associates tax-free.
A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A, even if the participants treat it as some other form of transaction (such as a loan, advance, gift or writing off a debt).
Division 7A can also apply if a trust has allocated income to a private company but has not actually paid it, and the trust has provided a payment or benefit to the company’s shareholder or their associate (as well as in other circumstances).
Myth 1: If I own a company, I can use the company money any way I like.
ATO response: A company is a separate legal entity, and there will be consequences every time the taxpayer takes money or accesses other benefits from their private company.
Myth 2: Division 7A only applies to the shareholders of my private company.
ATO response: Division 7A applies to both shareholders and their ‘associates’. The definition of an ‘associate’ is broad.
Myth 3: I don’t need to keep records when my private company makes payments, loans or provides other benefits to other entities.
ATO response: Taxpayers are legally required to keep records of all transactions relating to their tax affairs when they are running a business.
Myth 4: I can avoid Division 7A by temporarily repaying my loan before the private company lodges its tax return, and using the company’s money to make my repayments.
ATO response: A repayment made on a loan may not be taken into account if similar or larger amounts are reborrowed from the same company after making the repayment.
Myth 5: There are no tax consequences if I use my private company’s money to fund another business or income earning activity.
ATO response: Division 7A may apply to any loan a private company makes to its shareholders or their associates, regardless of what the loan recipient uses the amounts for.
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