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Div 7A loan terms
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Ensure Div 7a compliance with TMS Financials
At TMS Financials, we specialise in helping business owners with Division 7A loan agreements.

Our tax experts have a thorough understanding of the rules of Division 7A under the Income Tax Assessment Act, which covers loans from private companies to their shareholders or associates. We guide you through creating legal loan agreements that follow the required minimum interest rate, terms, and documentation to ensure your loan isn’t considered a dividend.

We can also help you understand the different options with both unsecured and secured loans, and ensure you make the minimum yearly repayments on time to avoid significant tax penalties.

Whether you’re refinancing loans or establishing new ones that meet legal standards, we make sure your financial activities comply with tax laws, keeping your tax obligations in check.

Why choose TMS Financials

Setting Up Compliant Loan Agreements

We make sure your Division 7A loan agreement complies with all the rules set out in Division 7A of the Income Tax Assessment Act. We help you draft a loan agreement that covers the minimum yearly repayment, the interest rate set by the Australian Taxation Office, and the longest allowable term for the loan. By focusing on these important requirements, we help protect your business from the risk of having these loans mistakenly treated as dividends, which could lead to considerable tax obligations.

Planning for Effective Repayments

We provide guidance on structuring your loan repayments that work with your business’s cash flow. This ensures all repayments are made on time, which is essential for keeping the tax benefits of compliant loans.

Regular Monitoring and Annual Reviews

At TMS Financials, we offer ongoing monitoring and perform annual reviews to make sure you meet Division 7A requirements throughout the financial year. We regularly check that all necessary repayments and interest are paid before your company’s tax return is due. Our proactive approach includes updating your loan agreements as needed in response to any changes in the law or your business situation, ensuring you remain compliant and optimally positioned for tax purposes.

Ensure Division 7A Compliance with TMS Financials

Our team at TMS Financials specialises in providing personalised tax solutions tailored to your unique situation. We can help you navigate through the complexities of tax planning, identify the most effective strategies for your situation, and ensure you maximise your tax savings.

We’re an Australian tax accounting firm with 30+ years of experience serving business owners and investors. Our reputation for reliability and exceptional client service is built on providing accurate financial advice and asset protection. We remain committed to serving our clients with integrity, professionalism, and quality, and have the expertise to help you succeed.

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We are a Sydney based tax accounting firm servicing clients Australia wide online since 1993

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Principal of TMS Financials

We strive to build long-term relationships with our clients and to be a trusted advisor for all their financial needs.

Understanding Division 7A Loan Terms

Division 7A is a part of Australian tax law that focuses on loans made by private companies to their shareholders or associates. It’s designed to prevent companies from passing on untaxed profits to shareholders in ways that should typically be taxed, such as with dividends.

Here are the basic details of Division 7A loan terms:

Minimum Yearly Repayment

Each year, there’s a required minimum amount that must be paid back to avoid tax issues. This amount includes both the principal (the amount borrowed) and the interest. This payment needs to be made by the due date for the company’s income tax return each year. If not, the Australian Taxation Office (ATO) may treat the unpaid amounts as dividends, resulting in potential tax liabilities for the shareholder or associate.

Interest Rate

The interest rate on these loans must be at least equal to the benchmark interest rate set by the ATO. This ensures the loan is seen as legitimate and not a way to distribute profits as untaxed dividends.

Loan Term

For unsecured loans, the repayment period cannot be longer than 7 years. If the loan is secured with a mortgage on real property, it can be extended up to 25 years.

Written Agreement

It’s crucial to have a formal written agreement for these loans. Without it, the ATO may treat the loan as a dividend right from the start.

What is a Division 7A Loan Agreement?

Division 7A sets out the rules for loans made within a company. By following these rules, individuals can minimise their tax liability. Typically, individuals are taxed at rates from 0% to 47%, whereas companies are taxed at a flat rate of either 25% or 30%.

To achieve a lower tax rate, it’s common for individuals to transfer funds to a “bucket company,” capping the tax rate at 25%. However, simply transferring money to a company does not guarantee the funds will end up in your personal accounts for use on personal expenses such as paying off a mortgage or boosting your disposable income.

A frequent approach to manage this is for the company to ‘lend’ the money back to the individual, who is a shareholder. This loan is then recorded on the company’s balance sheet and is scheduled to be repaid over several years. In some instances, these loans may not be repaid at all, which are referred to as ‘forgiven’ loans.

In recent years, the Australian Taxation Office (ATO) has intensified its scrutiny on certain types of ‘loans’, viewing them as potential tax avoidance strategies. These transactions, once considered simple inter-company loans, are now often classified as ‘disguised contributions’.

In response, the Australian government introduced a specific set of regulations known as Division 7A, which is part of the Income Tax Assessment Act. Division 7A was established to prevent private companies from distributing untaxed funds to shareholders under the guise of loans or other payments that should normally be subject to taxation as dividends.

Why Compliance is Crucial

Ensuring your Division 7A loan complies with the legal requirements is crucial because non-compliance can lead to penalties and increased personal tax rates, potentially raising your total tax liability to as much as 61.5%.

A compliant loan provides you with access to funds without triggering additional tax events, effectively allowing you to defer tax payments rather than avoid them.

For tailored advice, we encourage you to consult with one of our tax professionals today to ensure that your financial strategies are in line with Division 7A regulations.

Division 7A Loan Agreement Terms

The specifics of a Division 7A loan agreement can vary based on whether the loan is secured or unsecured.

Unsecured Loans

An unsecured loan does not require collateral and has a maximum repayment term of seven years. This shorter term means that repayments will generally be higher, as the entire loan amount plus interest must be repaid within this period.

Secured Loans

A secured loan is typically secured by real property and the terms can extend up to 25 years as a result. The extended term allows for smaller annual repayments, making it a more manageable option for long-term financial planning.
These terms are designed to ensure that loans from a company to its shareholders or their associates are properly documented and repaid in a manner that complies with tax laws, preventing them from being treated as dividends.

Strategies for Paying Yourself Without Triggering Division 7A

Do you own a private company and want to ensure you don’t trigger Division 7A tax implications? We’ve compiled a series of articles that detail various methods for distributing your company’s profits to yourself without falling afoul of Division 7A.

How to pay yourself a salary as a company director

In Australia one of the simplest methods for a company director to receive payment is through a salary via the company’s payroll. This process makes tax reporting straightforward and ensures compliance with Pay As You Go (PAYG) and superannuation obligations, allowing you to receive your income regularly.

How to pay director fees and allowances as a company director

To avoid triggering Division 7A when issuing director’s fees it is essential to adhere to tax laws, including proper PAYG withholding and making superannuation contributions. Consulting with a tax professional can help you stay compliant and optimise your tax benefits.

How to pay yourself bonuses and commissions as a company director

When it comes to bonuses and commissions, careful management is key to maximising benefits and ensuring they comply with tax regulations. This will help you avoid potential tax issues under Division 7A.

How to withdraw money using a Div 7a Loan Agreement

When drawing company funds for personal use, like purchasing a luxury item, it’s crucial to use a Division 7A loan agreement. This agreement ensures that the money used is not taxed as a dividend at your higher personal tax rate.

How to make loan repayments to shareholders for Division 7a

Paying dividends, especially fully franked ones, is an effective way to improve your tax position as a company director. Fully franked dividends distribute profits that have already been taxed at the corporate level, and they come with franking credits that can offset your personal income tax, potentially reducing your overall tax liability.

FAQs on Division 7A

What is Division 7A?
Division 7A is part of the tax laws aimed at preventing private company shareholders from accessing company profits without paying the appropriate taxes. This rule ensures that profits taken out of the company by shareholders are taxed properly. For example, if a company loans money to a shareholder or a related person, that loan may be considered as an unfranked dividend and taxed as income to the recipient.
When does Division 7A apply?

Division 7A applies under these circumstances:

  • The entity involved is a private company.

  • The company has profits or retained earnings.

  • A loan or payment is made to a shareholder or their associate.

  • These loans and payments are treated as dividends unless they comply with specific requirements.

What is a Division 7A loan agreement?
A Division 7A loan agreement is a formal arrangement that allows funds to be borrowed from the company by a shareholder or associate under terms that meet Division 7A’s requirements. This typically includes a commitment to repay the funds within a seven-year period for unsecured loans or up to 25 years if secured.
Why does the ATO enforce Division 7A rules?
The ATO’s rules around Division 7A help prevent tax avoidance by ensuring shareholders cannot exploit the lower tax rates of companies compared to personal tax rates without facing the same tax obligations.
Why can’t I just withdraw company profits for personal use?
Withdrawing company profits for personal use without a compliant structure can trigger Division 7A, treating the withdrawn amount as a dividend and taxing it at a high personal rate.
Can I transfer company profits to my spouse or trust instead of as a loan?
Transferring company profits to a spouse or trust can also fall under Division 7A if those transfers are not properly structured as compliant loans or dividends. Such transfers may be seen as an attempt to circumvent tax rules.
What’s the best way to access my company’s profits without a large tax bill?

The safest method to access company profits is through a fully franked dividend, which comes with tax credits that mitigate the tax impact on the shareholder.

What happens if my loan doesn’t comply with Division 7A?

Non-compliant loans are treated as dividends, meaning the amount loaned becomes fully taxable income with potentially high tax implications.

How do I ensure my loan remains Division 7A compliant?
To keep a loan compliant with Division 7A, ensure all repayments are made on time and the terms of the loan agreement are strictly followed, especially before the tax lodgment due date.
What are the repayment terms for a Division 7A loan?
Division 7A loans secured by property can have terms up to 25 years, while unsecured loans must be repaid within seven years. The term of the loan affects the size of the required repayments.
What happens if I can’t meet the minimum repayments outlined in the loan agreement?
Failing to meet the minimum repayment requirements can lead to the loan being treated as an unfranked dividend, incurring additional tax liabilities.
Is it better to take money out of the company as a loan or as a salary or dividend?
This depends on your personal tax situation and the company’s circumstances. Consult with a tax professional to determine the most tax-efficient method for your specific situation.
Would it be easier for me to repay all Division 7A loans now?
Repaying all Division 7A loans might simplify your financial situation, but you ought to consider consulting with a tax advisor to understand the broader implications.
What is the current ATO benchmark interest rate?
The current benchmark interest rate set by the ATO is 8.27%, but check the ATO website for the latest updates.
What are unpaid present entitlement?
Unpaid present entitlements occur when a trust earns income and allocates it to a beneficiary who does not immediately withdraw the funds, allowing the income to remain within the trust. This can affect Division 7A if the company related to the trust provides financial benefits to the shareholder or their associates.

Next step is to contact TMS Financials

TMS Financials provides you with a team of experienced professionals that help you achieve your financial goals through smart tax structures and strategic structuring.

Book a financial health review to see the difference we can make in your financial future.

Disclaimer

This outline is for general information only and not as legal, tax or accounting advice. It may not be accurate, complete or current. It is not official and not from a government institution. Always consult a qualified professional for specific advice tailored to your unique circumstances.

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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!

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