Division 7A is a tax provision in Australia designed to prevent shareholders of a private company from accessing company profits without paying additional tax. Normally, a company pays tax on its profits at a lower rate (25% or 30%), while individual shareholders might have a higher marginal tax rate (up to 47%). This could create a tax advantage of up to $22,000 for every $100,000 of income. Division 7A ensures that this tax advantage is eliminated.

For Example: If you have a family-owned company, and you decide to lend money from the company to yourself, your family member, or someone closely connected to your family. Division 7A can treat this loan as if the company paid you an unfranked dividend, and you might have to pay tax on it.

For Division 7A to be applicable, the following conditions must be met:​

1. The entity in question is a private company.​
2. The company has recorded profits or retained earnings.​
3. A payment or loan has been issued by the company.​
4. The payment or loan has been made to a shareholder of the company or an associate of the shareholder.​

If these conditions are met and Division 7A applies, the payment or loan is treated as a dividend from the company to the shareholder or their associate.​

This isn’t a foolproof workaround. Division 7A’s “interposed entity” rule can catch such strategies. If you’re considering this or similar tactics, our article on “How to Take Money Out of Your Private Company – Avoid Division 7A Penalties” offers valuable insights.

The most compliant method is to declare a fully franked dividend. While you’ll still face tax implications, this approach is straightforward. Our article on “How to Take Money Out of Your Private Company – Avoid Division 7A Penalties” provides a detailed guide on best practices and solutions.

Non-compliant loans under Division 7A are treated as unfranked dividends, leading to higher taxes. To prevent a tax rate which could exceed 60%, it’s crucial to ensure your loan is compliant. We offer specialist assistance to ensure your loan aligns with Division 7A regulations. Click here for Division 7A Solutions

To be Division 7A compliant, loans must be repaid or structured into a Division 7A-compliant loan before the lodgment day. If you’re uncertain about this, we’re here to help. Contact us to ensure your loan is compliant.​

The repayment terms are 25 years for loans secured over property and 7 years for unsecured loans. The loan term affects the minimum repayment, with 7-year loans having higher repayments than 25-year loans. Facing challenges with minimum repayments? Consider adjusting your loan term. Learn more about this solution here.​

Failing to meet the minimum repayments can result in the loan being deemed an unfranked dividend, which has tax implications. To understand various strategies and ensure you meet your minimum repayments, refer to our article on how to fund your Division 7A minimum yearly repayment.​

This decision relies on individual financial situations, tax brackets, and company profit margins. To gain clarity on the best option for you, schedule a comprehensive tax planning session with us. Click here to begin, and we’ll help you make the smart choice.

Repaying all DIV7A loans can simplify matters, but it’s vital to assess the broader financial and structural implications. We have solutions to help you eliminate your DIV7A loan and expert guidance for optimizing your setup. To learn more, click here