Division 7A of the Australian tax law is often misunderstood, leading to costly mistakes for private companies and their shareholders. Here, we debunk common myths to ensure you stay compliant and avoid unnecessary tax consequences.

Business Structure Misconceptions

Myth: The tax consequences are the same regardless of my business structure.

Reality: Different structures—sole trader, partnership, trust, or private company—have different tax rules. If you operate through a private company, Division 7A may apply to payments, loans, or benefits provided to shareholders and their associates.

Myth: I can use my company’s money however I want.

Reality: A private company is a separate legal entity. Any money taken from it—whether as salary, director fees, dividends, or loans—must be properly recorded and taxed. Unstructured withdrawals may trigger Division 7A tax implications.

Myth: Division 7A applies only to company shareholders.

Reality: Division 7A also applies to associates of shareholders, including relatives, spouses, children, controlled entities, and trusts benefiting the shareholder.

Record Keeping Misconceptions

Myth: I don’t need to keep records of payments or loans made by my private company.

Reality: Good record-keeping is a legal requirement. Failing to maintain records of payments, loans, or asset usage can lead to compliance issues and breaches of Division 7A.

Myth: I can record a dividend as a journal entry after the financial year ends to meet repayment obligations.

Reality: A journal entry alone is not sufficient. The offset of a minimum yearly repayment must be agreed upon and documented by both the borrower and the company by the end of the income year.

Payments to Other Entities Misconceptions

Myth: There are no tax consequences if my private company funds another business or income-earning activity.

Reality: Loans from a private company to shareholders or their associates, even for business purposes, may still fall under Division 7A.

Myth: I can bypass Division 7A by making payments or loans through other entities.

Reality: If payments or loans are directed through intermediaries (interposed entities), Division 7A may still apply, depending on the ultimate beneficiary.

Myth: Loans to trusts are exempt from Division 7A.

Reality: Division 7A applies to payments or loans from private companies to trusts and may also affect company beneficiaries’ entitlements.

Division 7A Interest Rate Misconceptions

Myth: The Division 7A loan interest rate is the same every year.

Reality: The benchmark interest rate changes annually. Ensure you use the correct rate to calculate your minimum yearly repayments.

Attempts to Circumvent Division 7A Misconceptions

Myth: I can avoid Division 7A by temporarily repaying my loan before the company’s lodgment day or using company money for repayments.

Reality: If you repay a loan only to re-borrow a similar or larger amount, the repayment may be disregarded. Using company funds to make repayments also does not count as a genuine repayment.

Myth: My company’s liabilities exceeding its assets will result in a negative distributable surplus.

Reality: Net assets for the distributable surplus calculation are only considered zero if the company’s assets do not exceed its liabilities and certain provisions.

Commissioner’s Discretion Misconceptions

Myth: The Commissioner will automatically disregard a Division 7A deemed dividend.

Reality: Discretionary relief is not guaranteed. You must meet specific conditions to justify the exercise of discretion.

Myth: The Commissioner will exercise discretion in my favor if I relied on a tax professional’s advice.

Reality: The Commissioner considers factors such as the tax adviser’s mistake, the reasonableness of your reliance, and the disclosures made to the adviser. Simply failing to obtain Division 7A advice does not qualify as reasonable reliance.

Stay Compliant

Understanding Division 7A is crucial for private companies and their stakeholders. Ensure you keep accurate records, structure transactions properly, and seek professional advice to avoid unintended tax consequences.