Division 7A Loan Agreement
At Caubrooks, we're dedicated to offering Division 7A loan agreement services that are specifically tailored to business owners.
Our tax experts can help you navigate the complexities of Division 7A of the Income Tax Assessment Act, which regulates loans from private companies to their shareholders or associates. We can guide you in setting up compliant loan agreements that meet requirements such as the prescribed minimum interest rate, adequate loan terms, and the necessary written agreements to prevent your loan from being treated as a dividend.
We can also assist in the management of loan agreements, including unsecured and secured loans. Our services include ensuring that minimum yearly repayments are made in accordance with the law, helping you avoid heavy tax implications. Whether it’s refinancing existing loans or structuring new complying loans, we ensure that all financial activities are done in compliance with tax laws, thereby optimising tax efficiency.
Why Choose Causbrooks.
Compliance Review and Complying Loan Agreement Setup.
At Caubrooks, we ensure your Division 7A loan agreement is fully compliant with the provisions of Division 7A of the Income Tax Assessment Act. Our team can helpy you draft a loan agreement that covers all essential aspects, such as the minimum annual repayment, the benchmark interest rate set by the Australian Taxation Office, and the maximum loan term.
By addressing these key requirements for loan agreements, we help safeguard your transactions from being misclassified as dividends, thereby preventing potential significant tax liabilities.
Strategic Repayment Planning.
We provide strategic advice to structure the repayment schedules of your loans in order to seamlessly integrate with your company’s cash flow. This careful planning helps ensure that all repayments are made on time, which is crucial for maintaining the tax benefits associated with complying loans.
Ongoing Monitoring and Annual Reviews.
Caubrooks offers ongoing monitoring and conducts annual reviews to ensure you comply with Division 7A requirements throughout the financial year. This includes regular checks to ensure that minimum yearly repayments and interest charges are met before the company’s income tax return due date. We stay proactive in updating loan agreements in response to any changes in legislation or shifts in your business circumstances, and we are prepared to advise on necessary adjustments to maintain full compliance and optimal tax positioning.
Ensure Division 7A compliance with Causbrooks
At Causbrooks, we’re dedicated to helping businesses with their taxation and accounting needs. If you’d like to discuss your own situation, please complete the form below.
Our team of dedicated accountants is committed to providing the best possible experience for our clients, and we believe that our combination of longevity and experience in the industry and our commitment to embrace innovation and change make us uniquely qualified to do so.
Division 7A loan terms.
Division 7A is part of the Australian tax law that applies when a private company lends money to a shareholder or their associate. Essentially, it aims to prevent private companies from distributing untaxed profits to shareholders via loans or other forms of payment that would typically be subject to dividends.
Here are the key elements of Division 7A loan terms:
Minimum Yearly Repayment.
Each year, a minimum amount must be repaid to prevent tax complications. This includes both the principal (the borrowed amount) and interest. The minimum yearly repayment must be made before the due date of the company's income tax return each year.
Failing to meet these terms could result in the ATO treating the loan as a dividend, potentially leading to significant tax liabilities for the shareholder or their associate. Essentially, the ATO's stance is clear: adhere to the rules, or face taxation as though you've received profits from the company.
Interest Rate.
The loan's interest rate must be at least equal to the benchmark interest rate established by the Australian Taxation Office (ATO) to qualify as a legitimate loan and not a disguised dividend. To learn more about the current benchmark interest rate, visit the ATO's Division 7A – benchmark interest rate webpage here.
Loan Term.
The duration for unsecured loans cannot exceed 7 years. If the loan is secured by a mortgage on real property, the term may extend up to 25 years.
Written Agreement.
Having a formal loan agreement is crucial. Without one, the ATO may immediately treat the loan as a dividend.
What is a Division 7a Loan Agreement?
Although it may seem complex, Division 7A essentially sets rules for making loans within your company. As an individual, adhering to Division 7A helps minimise your tax liability. Individuals pay taxes at rates ranging from 0% to 47%, while companies pay a flat rate of either 25% or 30%.
It can be more tax-efficient for an individual to distribute funds to a bucket company to cap the tax rate at 25%. However, distributing money to a company doesn't usually result in those funds ending up where you want them. Ideally, you'd prefer the money in your own accounts for personal expenses, such as paying down your mortgage or increasing your disposable income.
A common solution to this issue has been for the company to 'lend' cash back to the individual as a shareholder. The company would then record this loan on their balance sheet to be repaid over several years or, in some cases, not at all (known as a 'forgiven' loan).
In recent years, the ATO has started cracking down on these types of ‘loans’, and now effectively considers them as a form of tax avoidance. Now, these types of loans are labelled as ‘disguised contributions’.
As such, a new set of rules was devised by the government. This is known as Division 7A.
Why Compliance Matters.
It's important your Division 7A loan is a complying loan as non-compliance can result in penalties and higher personal tax rates, potentially increasing the overall tax to 61.5%.
Compliant loans allow access to funds without triggering additional tax events, deferring tax payments instead of avoiding them.
For personalised advice, consult with one of our tax professionals today to ensure your strategy aligns with Division 7A requirements.
Division 7a loan agreement terms.
The terms of the Division 7a loan can differ depending on whether or not the loan is a secured loan or an unsecured loan.
Unsecured loans - an unsecured loan has a maximum term of seven years.
Secured loans - a secured loan has terms of up to 25 years, depending on the security.
Strategies to pay yourself without triggering Div 7a.
Do you own a private company and wish to avoid triggering Div 7a?
We have assembled a series of articles outlining the various ways you can pay yourself out of your company's profits without triggering Division 7A.
As a company director in Australia, paying yourself a salary through your company’s payroll simplifies tax reporting and compliance with PAYG and superannuation requirements. This approach offers a straightforward way to manage and receive your income regularly.
When paying director fees, it's important to ensure you comply with tax laws, including proper PAYG withholding and superannuation contributions to avoid unintended Division 7A tax implications. Consulting with a tax expert can help maintain compliance and optimise tax benefits.
When paying yourself a bonus as a company director, it's crucial to manage these payments carefully to maximise benefits and ensure compliance with tax laws, avoiding unintended tax consequences under Division 7A.
As a company director, paying dividends, particularly fully franked dividends, can enhance your tax position. These dividends distribute profits that have been taxed at the corporate level, providing franking credits to offset your personal income tax and potentially reduce your taxable income.
When using company funds for personal expenses, such as buying a luxury item, it's important to follow a Division 7A loan agreement to prevent these funds from being taxed as a dividend at your personal rate.
FAQs.
About Causbrooks.
It's important you seek professional advice to understand the most tax effective manner to structure your business entities. A bucket company strategy has its place in an effective tax planning strategy, but whether a bucket company is right for you ultimately depends on your unique situation and your personal and professional goals.
Our tax accountants have decades of experience helping their clients navigate their personal tax rate and optimise their own tax paid within the boundaries of what the Australian Taxation Office (ATO) allows. If you have a private company and pay the top marginal tax rate, but don't currently have a bucket company in place, it might be a good time to speak with us to learn whether you could have a more tax effective strategy in place.
Disclaimer.
Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.
Contact us today for a consultation.
Contact us today to learn more about how our accounting services can benefit your business. We look forward to hearing from you and helping you achieve financial success!
