The ATO is cracking down on business owners who take money or use company resources for their personal uses.
With a blurry line between personal and working life for business owners, they often utilise company resources for their personal uses. Whilst there are tax laws preventing individuals from accessing profits or assets of the company in a tax-free manner, it is still occurring and the ATO has had enough.
The ATO launched a new education campaign to raise awareness of common issues and tax implications that business owners may face.
What The Tax Law Requires
Division 7A in the tax law aims at situations where a private company provides benefits to shareholders or their associates in the form of a loan, payment or by forgiving a debt. It applies to when a trust has allocated income to a private company but has not paid it, and the trust has provided a payment or benefit to the company’s shareholder or their associate. The division was introduced to prevent shareholders from accessing company profits or assets without paying the appropriate tax. If this is triggered, the recipient of the benefit is taken to have received a deemed unfranked dividend for tax purposes and taxed at their marginal tax rate.
This can be prevented by:
- Paying back the amount before the company tax return is due
- Putting in place a complying loan agreement between the borrower and the company with a minimum annual repayment at the benchmark interest rate
The Problem Areas
Common issues relating to Division 7A includes:
- Incorrect accounting (often not recognised), for the use of company assets by shareholders and their associates
- Loans made without complying loan agreements
- Reborrowing from a private company to make repayments on Division 7A loans
- The incorrect interest rate applied to Division 7A loans (there is a set rate that must be used)
Mitigating these issues could come down to a few simple steps:
- Do not pay private expenses from a company account
- Keep proper records for your company that record and explain all transactions, including payments to and receipts from associated trusts and shareholders
- If the company lends money to shareholders or their associates, ensure that there is a written agreement with terms so that it can be treated as a complying loan. This is to prevent the loan amount from being treated as an unfranked dividend.
If you have any queries, please reach out to our Accounting Team for further information.
