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Welcome to our guide on making sure you handle your Division 7A Minimum Yearly Repayment correctly. We’re here to explain why it’s vital and how you can manage it without stress. Imagine you’re an electrician running your own business. When you take money out of your company as a loan, it’s like the company lending you money. But here’s the catch: you need to pay that loan back to your own company each year to follow the law.

So, why is this so important? Well, not doing it right can lead to extra costs, and nobody wants that. In our guide, we’ll show you why you must comply with the law and how you can find the money to make those repayments. Let’s dive in and make this process clear and straightforward for you.

Division 7A Minimum Yearly Repayment refers to the mandatory annual payment that shareholders must make when they’ve borrowed money from their company under Division 7A tax rules. This requirement ensures that shareholders are meeting their loan obligations and is an essential aspect of compliance.

Why is it Important to Make the Minimum Yearly Repayment?​

What If You Don’t Make It?

Making the minimum yearly repayment is crucial for several reasons:​

Tax Compliance

It helps shareholders stay compliant with Division 7A tax regulations, avoiding penalties and legal issues.​

Avoiding Double Taxation

Failure to meet the repayment can lead to the borrowed amount being treated as an unfranked dividend, resulting in double taxation. The company pays tax on it, and the individual shareholder also faces taxation at their personal rate, which can be significantly higher.​

If you don’t make the minimum yearly repayment, it can lead to financial challenges, strained relationships, and legal consequences. Avoiding this situation is key.​

How Division 7A Minimum Yearly Repayments Are Calculated

Calculating Division 7A Minimum Yearly Repayments Made Simple

Understanding how to calculate Division 7A Minimum Yearly Repayments can be challenging, but we’re here to help. Our TMS DIV7A calculator simplifies the process, ensuring accuracy and compliance with ease.

To calculate your minimum yearly repayment, you’ll need the following information:

  1. The income year when the loan was obtained.
  2. The income year for which you want to calculate the minimum yearly repayment (e.g., 2023-24).
  3. The outstanding unsecured loan amount at the end of the previous income year.
  4. Details of any repayments made towards the loan, including dates and amounts.

Loan Terms:

Unsecured loans have a term of 7 years.

Secured loans have a term of 25 years.

Ready to calculate your minimum loan repayment or check if you’ve met the requirements? Use our Division 7A Calculator by clicking [here].

It’s a straightforward way to ensure compliance and peace of mind.

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Funding Your Division 7A Minimum Yearly Repayment: 

6 Practical Strategies.

Now that you’ve gained clarity on how to calculate your Division 7A minimum yearly repayment using our handy calculator, let’s explore six effective strategies to fund these repayments. These strategies ensure compliance while optimizing your financial management:

Fully Franked Dividend

Cover the minimum loan repayment using fully franked dividends from the company

Find out how

Loan Repayment

Offset Your Minimum Loan Repayment Against Credit Loans in the Company

Find out how

Paying Bonus

Get a bonus from your company to cover your minimum loan payment for compliance

Find out how

Asset Transfer

Transfer your personal assets to the company, using them to repay the loan

Find out how

Borrow from Bank

Borrow from the bank to cover minimum loan repayment.

Find out how

Refinancing for Lower Minimum Loan Payments with a 25-Year Term

Find out how

Paying Fully Franked Dividend for Your Division 7A Minimum Repayment​​

Suppose you’re a shareholder who borrowed $500,000 from your company by the end of the financial year in 30 June 2022.

Using our TMS Div7A calculator, your minimum yearly loan repayment comes out to be $86,150, covering both the principal and interest. This is the amount you need to pay back to the company by 30 June, 2023.

Assuming You don’t have the $86,150 at hand to make that minimum loan repayment.

So, what can you do?

One strategy you can explore is getting your company to pay you fully franked dividends. This way, you can use this amount to meet your minimum loan repayment.

The Company's Perspective

Your company has the option to pay you, the shareholder, a Fully Franked Dividend. In this example, let’s assume the company decides to pay you a dividend of $87,000, slightly exceeding the minimum loan repayment of $86,150.​

To make this strategy work, the company needs to prepare dividend statements meticulously. These statements must accurately reflect the imputation credits associated with the dividend. In this case, the dividend statement shows a franked dividend of $87,000 and a franking credit (or imputation credit) of $29,000, based on a company tax rate of 25%.​

Receiving the Dividend

When the company pays out this dividend, you, as the shareholder, will receive $87,000. Now, here’s where the magic happens: you can use this $87,000 to offset against the minimum loan repayment, ensuring you comply with the DIV7A rule that mandates meeting the minimum payment requirement.​

The Gross-Up Step

Once you’ve received the dividend, you must gross up the amount. In this example, that calculation is $87,000 plus $29,000, summing up to $116,000. This entire figure, $116,000, should be declared as assessable income in your tax return.​

Taxation and Offsetting

fter accounting for the franking credit tax offset of $29,000, the additional tax on the dividend amounts to approximately $20,000. Importantly, the distribution of the dividend must occur by 30 June 2023.​

This strategy not only assists in meeting your minimum loan repayment but also provides a tax-efficient way to manage your financial obligations while optimizing your overall tax position​

To learn more about how to use Fully Franked Dividends to meet your minimum loan repayment, click here.

Offset against Credit Loans in a company

You can offset your minimum loan repayment against credit loans in your company. Here’s how this works:

1. Check if the Company Borrowed from You

First, check if your company owes you or your entities money. You can find this in your company’s balance sheet under “Credit Loans” in the liabilities section. This could be listed as a loan from directors or shareholders or a loan from your Trust.

2. Scenario Example

Let’s say you have a discretionary trust. It invests in shares, makes profits, and transfers some cash to your company for operational needs. In this example, your company owes the trust $87,000

3. Avoiding Division 7A Rules

When your company repays the $87,000 to the trust, it doesn’t fall under Division 7A rules because it’s not a new loan. It’s a repayment of an existing loan.

4. Trust Lending Back

Now, the trust lends you the same $87,000, which also doesn’t trigger Division 7A rules. This is because it’s a trust lending to an individual, not directly related to the private company.

5. you take that $87000 and pay the company back

in respect of the Division 7A minimum repayment. you can do this all by journal entries and proper documentation, so no cash actually needs to be exchanged,

6. Important Checks

Make sure the trust didn’t borrow money from another private company, and it doesn’t owe any money to your company. The source of funds should come from the sale of shares, not indirectly from a company.

In simple terms, you can offset the loan your company owes to a trust by making a journal entry and proper documentation. This way, you avoid Division 7A rules. Just ensure the trust’s funds come from selling shares and not from another company.

The Role of a Proactive Accountant in Financial Strategies:

While this strategy might seem simple, doing it right needs a smart accountant. They need to know your whole financial setup inside out. The better they know your stuff, the better they can help you.

Some accountants just do the basics, but a great one goes the extra mile. When it comes to tricky stuff like offsetting credit loans without breaking the rules, you need to be super careful. If you mess up, you could end up with more money problems.

If you’ve never heard about certain money tricks before, it might be because your accountant isn’t thinking ahead. In the money world, seeing the big picture and finding opportunities is a big deal. A good accountant doesn’t just crunch numbers; they help you build a better financial future.

Paying Bonus to Fund Minimum Loan Repayments

To fund your minimum loan repayments, your company can pay you a bonus as a director. You can then use this lump sum to cover your minimum loan repayments.

Here’s how it works:

Getting a Bonus

Your company pays you a bonus, Let’s say $87,000, as a director. This bonus allows the company to get a tax deduction, which is a good thing for the company.

Your Personal Tax

On the downside, you’ll need to pay tax on this bonus based on your personal marginal tax rate. This strategy works better if your marginal tax rate is lower.

Better Than Unfranked Dividends

Your company paying a bonus to you is more effective than paying an unfranked dividend. With a bonus, the company gets a tax deduction. But if they pay a dividend, it’s not tax-deductible for them. They’ve already paid tax on the dividend’s profit, and you’d need to pay tax again on the full dividend amount

Market Value Matters

Make sure the bonus you receive matches what’s typical for someone in your position. If it’s too high, it could be deemed as a dividend and not tax-deductible for the company.

Watch for Excessive Payments

Be cautious not to go overboard with the bonus. If it’s too much, it might be deemed to be dividend, and that’s not good for tax purposes.

Other Costs

Don’t forget about other costs like payroll tax and superannuation when paying a bonus.

In simple terms, this strategy lets you use a director’s bonus to cover your minimumloan repayments. Just remember to keep things in line with market values, and be aware of any extra costs involved.

Paying a bonus seems like an easy way to implement, but you need to work out how much to pay the bonus so it’s not excessive. You can do this through careful calculations. For us, we use tax planning to assess different scenarios and determine the right amount for your company to pay you as a bonus, ensuring it’s not excessive. If you’re considering this strategy, reach out to us for assistance in finding the optimal bonus amount tailored to your specific situation,

Transferring an Asset

You can transfer your personal assets, to your company to offset your minimum loan repayment. Think of it as your company purchasing these assets from you. Instead of receiving cash, your company will deduct the owed purchase price from the repayment you owe.

This method doesn’t involve actual cash exchange, but it’s crucial to maintain comprehensive documentation to prove the transaction’s occurrence. Make sure this process is completed by 30 June to stay compliant. You may need to create documents like a sale and purchase agreement or a deed of offset to ensure everything is properly recorded.

When selecting the assets to transfer, focus on those that are currently at a loss. The goal is to choose assets that won’t trigger capital gains tax when transferred. Keep in mind that companies don’t enjoy the 50% capital gains tax (CGT) discount that individuals might get. So, if your company eventually sells the transferred asset, it will be liable for tax on the full capital gain. This strategy is particularly useful for assets you believe won’t appreciate in value.

However, a word of caution regarding assets used for personal enjoyment, such as cars or boats. If you find yourself in a tight financial spot with insufficient assets or cash for repayments, transferring these personal use assets to the company can be an option. But here’s the catch: once the company becomes the owner of these assets, you’ll need to pay market rent to the company each time you use them. Failure to do so might lead to the unpaid rent being treated as a deemed dividend under Division 7A, a tax regulation. It’s essential to keep these personal use assets primarily for company events rather than personal leisure to make this strategy more tax-efficient.

Borrow from Bank​​

Paying with Your Cash Reserve A smart way to cover your Division 7A minimum repayment is by using your available cash. Let’s say you have a home loan with a bank like CBA and keep some extra money in an offset account. You can dip into that cash to meet your repayment needs. However, keep in mind that this might increase the interest on your home loan. Whether you can claim tax deductions for this interest depends on how you originally used the money from your company. If it was invested to make money, like buying a rental property, then you can likely deduct the interest. But if the funds were used for personal stuff, like buying a boat, then the interest on your Division 7A loan won’t be tax deductible.

Getting a Bank Loan Another option is to get a separate loan from a bank to cover your repayment. These loans typically have higher interest rates than your regular home loan. It’s important to note that the interest on this bank loan won’t be tax deductible. This is because the purpose of this loan is to repay your Division 7A loan, which was originally taken for personal use, such as buying that boat. So, while it’s an option, it won’t provide any tax benefits.

Refinancing for Lower Minimum Loan Payments with a 25-Year Term​​

You can refinance your Division 7A loan into a secured loan with a 25-year term.
Here’s how it works:

Secured Loan

Refinancing essentially means that you’re turning your existing loan into a secured one. This means the company you owe the money to takes your valuable assets, like a house, as collateral. This provides security for the loan, making it less risky for the lender.

Extended Loan Term

With this refinancing, the term of your loan is extended from the original 7 years to a longer 25-year period. Think of it as spreading your repayments over a much more extended timeframe.

Reduced Minimum Payments

When you stretch out your loan over 25 years, your minimum loan payments each year become significantly lower. For example, if you had to pay $85,691 annually, it could reduce to around $34,663. This makes your financial burden lighter and more manageable.

In summary, refinancing to a 25-year term essentially means securing your loan with assets and spreading out your repayments over a longer period. This can result in substantially lower minimum loan payments, making it a smart strategy to ease your financial obligations.

To implement this strategy, you’ll need legal assistance. If the assets you want to use as security, like your property, already have a mortgage with a bank, and the bank is the primary lender, you’ll need their consent to place a second mortgage on the property. If they agree, a lawyer will prepare the necessary loan agreement with security over the property, making the loan a secured one. The ATO allows a 25-year term for secured loans, which substantially reduces your minimum loan repayments. Funding this reduced amount should be more manageable for you.”

Ready to refinance your loan and reduce your payments?

Contact us today to get started.

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Disclaimer​

Please note that the information provided in this outline is for general informational purposes only and is not intended as legal, tax, or accounting advice. The information may not be up to date, complete or correct and is subject to change. It’s not an official document from any government institution. Every business and financial situation may require additional or different information. It’s always recommended to seek advice from a qualified professional such as an accountant, tax professional, or lawyer for specific advice tailored to your business’s unique circumstances.