Business Tax Compliance
Division 7A is the ATO rule that stops private-company owners from accessing company money tax-free. Break the rules and the “loan” you took can be re-labelled an unfranked dividend – taxed at your top marginal rate with no franking credits. Ouch.
The ATO recently released “Division 7A Myths Debunked” to clear up the most common traps. Here’s the plain-English version – plus what you should do next to stay compliant.
1. “It’s my company – I can use the money however I like.”
Fact: A company is a separate legal entity. If you take cash or use company assets personally, Division 7A can apply unless it’s paid as salary, wages, or a properly declared (and taxed) dividend.
2. “If I move money through another entity, Division 7A won’t catch it.”
Fact: Payments or loans funnelled through trusts, partnerships or even another company can still be caught. These interposed-entity arrangements are squarely within Division 7A’s reach.
3. “We’ll fix it with a journal entry after year-end.”
Fact: A back-dated journal alone won’t save you. To offset (say) a dividend against a loan repayment you must have a real dividend, a real loan agreement and a signed offset agreement all in place before year-end.
4. “The benchmark interest rate is the same every year.”
Fact: The Division 7A benchmark interest rate changes annually. Use last year’s rate and you’ll under-pay your minimum yearly repayment – and trigger a deemed dividend.
5. “Myth-busting only matters at tax time.”
Fact: Most Division 7A mistakes happen during the year: undocumented drawings, loans without agreements, or using company cash for personal expenses. The ATO says the errors are usually “simple in nature” – but expensive if you ignore them.
Quick Checklist to Stay Out of Trouble
|
✅ Do This |
❌ Don’t Do This |
|---|---|
|
Put a written loan agreement in place before the company’s lodgement day. |
Treat the company bank account like your personal ATM. |
|
Calculate and pay the minimum yearly repayment (principal + benchmark interest). |
Assume a journal entry dated 30 June will fix everything later. |
|
Keep clean records: minutes, offset agreements, dividend statements. |
Funnel loans through another entity “to keep it off the radar”. |
|
Review the new benchmark rate each July. |
Re-borrow repayments or cycle money through an offset account – the ATO is watching. |
Need a Division 7A Health Check?
Linix Accountants helps private-company owners document loans correctly, calculate repayments and avoid nasty “surprise” dividends. If you’ve drawn on company funds this year – or you’re unsure your existing loan agreements are watertight – let’s talk.
Contact Don Su, CPA
📧 dons@linixaccountants.com.au | 📞 0424 755 678
Don’t let myths turn into tax bills – get the facts and stay compliant.
