Imagine having a vault of company assets at your disposal, but every time you reach for the key, you’re met with a complex web of tax regulations.
The Australian Taxation Office (ATO) has specific guidelines and regulations to prevent accidental (or intentional) misuse and ensure compliance.
Let’s examine what needs to be done to ensure compliance when accessing private company money or assets.
Division 7A: The basics
Division 7A of the Income Tax Assessment Act 1936 is designed to prevent private companies from making tax-free distributions to shareholders (or their associates) through payments, loans, or debt forgiveness. If these transactions are not handled correctly, they may be treated as unfranked dividends, which could have significant tax consequences.
Common transactions and their implications
Payments
Any payment made by a private company to a shareholder (or their associate) can be deemed a dividend unless it’s a legitimate salary, wage, or a genuine repayment of a loan.
Loans
Loans from a private company to a shareholder (or their associate) must be properly documented and meet specific criteria, such as having a written loan agreement with a set term and minimum interest rate. Otherwise, they could be treated as unfranked dividends.
Debt forgiveness
If a private company forgives a debt owed by a shareholder (or their associate), this could be treated as a dividend unless it meets specific exemptions.
How to manage Div 7A risks
- Document transactions: Ensure all payments, loans, and debt forgiveness transactions are well-documented and comply with ATO requirements.
- Loan agreements: Create formal loan agreements that specify the terms and conditions, including interest rates and repayment schedules.
- Monitor and review: Regularly review transactions to ensure ongoing compliance with Division 7A.
What may be exempt or excluded?
Certain payments and loans may be excluded from being treated as dividends, such as:
- Payments of genuine salaries and wages.
- Loans made in the ordinary course of business on commercial terms.
- Certain distributions made by liquidators.
Practical tips to implement
- Keep clear records: Maintain detailed records of all transactions between the company and its shareholders or associates.
- Seek professional advice: Consult with a tax professional or accountant to ensure compliance with Division 7A and other tax obligations.
- Stay informed: Keep up-to-date with ATO guidelines and any changes to tax laws that may affect private company transactions.
Accessing private company money or assets requires careful management to avoid adverse tax consequences. If you’re unsure about anything raised in this article, speak with your trusted accountant for further clarification.
