If you are running your pool or spa business from a company or have a bucket company in your family group, chances are you’ve heard your accountant mention Division 7A a handful of times. Division 7A is designed to stop people accessing company’s cash tax free.
The ATO has recently flagged some common myths about Division 7A that might help paid a clearer picture
Myth 1: It’s my company, I can use the money however I like.
Incorrect. You can generally use company’s money to pay for company related expenses and meet company’s obligations. However, the company is a separate legal entity from you as a shareholder or director (or both). You can generally access the company’s money by getting paid in wages or dividends and anything that falls outside of this may attract Division 7A rules.
Myth 2: Division 7A only applies to shareholders.
Not true. Division 7A also applies to associates of shareholders such as spouses, children, relatives, and even related trusts or companies. So, a loan to your spouse, for example, may still trigger Division 7A.
Myth 3: I’ll just record a dividend via journals after year-end to offset my minimum yearly repayment obligation for that income year.
Nope. You can’t backdate entries without supporting evidence showing dividends were declared prior to 30 June to properly offset the loan’s minimum repayments.
Myth 4: I can use my private company's money for another business or investment without tax consequences.
Under Division 7A, any loan from a private company to its shareholders or their associates can have tax consequences. This applies regardless of the loan's purpose and also covers the private use of company assets.
Myth 5: I can avoid Division 7A by channelling payments or loans through other entities, like a trust.
Division 7A can still apply. The rules focus on who ultimately receives the money, so using intermediaries (called 'interposed entities') does not bypass the law.
Myth 6: The Division 7A interest rate never changes.
It changes every year. The benchmark interest rate is set annually by the ATO and must be applied to Division 7A complying loan agreements.
Myth 7: I can avoid Division 7A by temporarily repaying my company loan just before the tax deadline, or by using the company's own money to make the repayment.
Repayments are likely to be disregarded if you reborrow a similar amount soon after. Using a loan from the same company to fund a repayment is also not considered genuine.
Myth 8: I can repeatedly borrow from my company for my mortgage offset account, repay it just before the end of the financial year, and reborrow it again in the new year without any tax problems.
This cyclical arrangement has consequences under Division 7A. Because there is a clear pattern of reborrowing, the repayments will be disregarded. You will be deemed to have received a taxable, unfranked dividend for each year you follow this arrangement.
If you need to speak to an accountant about your pool or spa business, you can book a 20min initial chat with our partners, Inspire Accountants at https://inspire.accountants/chat/