A private company can be a strong structure, but it is important to remember one thing: company money is not personal money. Personal drawings, holidays or home costs paid from the company account can create Division 7A issues if they are not properly documented.
What is Division 7A?
Division 7A is an anti-avoidance rule. If a private company provides a loan, payment or forgiven debt to a shareholder or their associate without the right structure, the amount can be treated as an unfranked taxable dividend.
Three compliant paths
To reduce the risk of unexpected tax, money taken from a company should usually be treated in one of these ways:
- A salary or wage, with PAYG withholding handled correctly.
- A dividend declared from company profits.
- A complying Division 7A loan agreement.
If you use a loan agreement, it must be in writing before the company’s lodgment day for the income year in which the loan is made. The interest rate must be at least the ATO’s Division 7A benchmark interest rate, and minimum yearly repayments generally need to be made by 30 June.
It is worth reviewing shareholder drawings before year-end so any issues can be fixed while there is still time.
Source: ATO – Division 7A.
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