If so, then you need to keep reading…..
Over the years, we have seen many business owners taking money out of their own companies – mainly because they believe it is theirs. The money is then used to purchase the family home, a new car, boat and for many other good reasons.
This is not technically correct and there is a fair sting in the tail to not managing this correctly – it can lead to huge tax issues if the proper steps are not taken in treating these transactions correctly.
This type of transaction is caught by Division 7A. It’s sole purpose is to prevent private companies from making tax-free distributions of profits to shareholders (or their associates). With associates including family members and other related entities but not limited to.
Some of the common transactions that may be subject to Division 7A include the following:
- Amounts paid by the company to a shareholder or shareholder’s associate
- Amounts lent by the company to a shareholder or shareholder’s associate and are not fully repaid back by year-end; and
- Amounts of debt owed
These transactions may be caught under the Division 7A provisions and if they are, will be treated as a deemed dividend at the end of the financial year. The deemed dividend is then included as assessable income of the shareholders or associate and is taxed at your marginal rates.
Furthermore, a deemed dividend is assessable and is generally unfrankable. As such, this can be very costly, adding thousands of dollars to the shareholder’s or associate’s tax bill.
You must take action immediately
In order to avoid any nasty tax surprises, action needs to be taken now:
- Repay the amount prior to the end of the financial year;
- If you cannot repay the loan, then enter into a loan agreement. Interest will be charged and repayments required to be made. If this is the case, Please contact us ASAP;
- If the payment is made to the shareholder or associate who is also an employee of the company – than the dividend may be treated as a fringe benefit instead;
- Payments of genuine debts; and
- Payments or loans excluded by virtue of other tax provisions may be excluded.