Division 7A of the Income Tax Assessment Act is a mechanism used to ensure that tax free payments are not made to directors, shareholders or associated entities by way of loans that are left outstanding or later written off.
This is achieved by treating certain types of payments as dividends paid by the company. The dividend payments are a form of assessable income. The following types of payments fall under Division 7A
To discern whether or not a particular payment is considered under Division 7A, ask yourself the following :
If the answer is yes to both of the above questions the payment is probably subject to 7A provisions . Seek further professional advice if you are still unsure of the condition of the payment.
All companies wishing to avoid tax penalty under Division 7A are strongly advised to implement loan agreements for eligible transactions before lending to associates.
All companies wishing to avoid tax penalty under Division 7A are strongly advised to implement loan agreements for eligible transactions before lending to associates.
Deemed dividend provisions will not apply where a loan agreement is in place between the company and the entity receiving the payment from the company. The following is a brief outline of some of the conditions that must be met :-
The associate must pay the minimum yearly repayment each year , or the amount will be classed as a dividend in the income year in which the minimum yearly repayment was not made.
Your Division 7A Loan Agreement should include the full names of the parties, the terms of the loan such as the loan amount, the date the loan is drawn down, the repayment terms, repayment dates, interest payable and the date the agreement was made.
The Agreement does not need to be approved by the ATO , although it will need to satisfy all of the requirements of the Income Tax Assessment Act.
For more information or to download a Division 7A Loan Agreement Kit
