As the owner of a private company, you may sometimes borrow money from your business. However, thanks to Div 7A, failing to properly record that loan could land you in some serious tax problem.

What is Div 7 A? It is an anti-avoidance measure designed to stop private companies distributing Tax-free profits to shareholders or their associates. It applies to all loans, credits and advances made by private companies to their shareholders or their associates.

Who is considered an Associate? Partners, spouse, child of a partner, a relative or even a company controlled by a shareholder or associate.

Div 7 A is triggered when a company

• Makes payments on behalf of shareholders or their associates
• Transfer to shareholder or their associates property below market value
• Lends money to a shareholder or shareholder’s associate without a specific loan agreement, and the loan is not fully repaid by lodgement day of that income year
• Forgives a debt owed by a shareholder or shareholder’s associate to the company

Consequences:

These payments are treated as assessable income to the receiving shareholder or associate and will be taxed at their marginal tax rate. Know more on this with rigorous business tax preparation services in Sydney.

How to avoid it?

Don’t pay private expenses from a company account

Keep proper records that explain all company transactions, including payments to and receipts from associated trusts and shareholders and their associates

Create a written agreement with terms that ensure the loan is treated as a complying loan if and when the company lends money to its shareholders or associates

Now tell me, are you a div 7 A compliant? Still doubtful? Entrust the highly recommended tax accountants in Sydney.