Division 7A: ATO Warns Business Owners About Common (and Costly) Mistakes
If you’re a shareholder in a private company, it’s worth brushing up on how Division 7A works, especially if you’ve ever taken money out of the company for personal use. According to the ATO, many of the issues they see around Division 7A come down to simple misunderstandings, and ultimately, they can be expensive.
So, what is Division 7A?
Division 7A is a section of tax law designed to stop private company funds being accessed tax-free by shareholders or associates. If you (or someone connected to you) takes money out of the company without meeting certain conditions, the ATO may treat that payment as an unfranked dividend, meaning it gets added to your personal taxable income.
This applies to:
- Loans
- Payments
- Use of company assets
- Or other forms of benefiT
And while the rules can be complex, the ATO says most of the mistakes they see are actually pretty straightforward.
Common Division 7A pitfalls:
- Using company money like it’s your own: A private company is a separate legal entity. Taking money out for personal expenses without proper documentation or a compliant loan agreement can trigger Division 7A consequences.
- Not having a Division 7A loan agreement in place: If you borrow money from your company, it needs to be under a formal loan agreement, with minimum yearly repayments and the right interest rate applied.
- Applying the wrong interest rate: When repaying a Division 7A loan, you must use the ATO’s benchmark interest rate for that financial year, and it changes annually.
Many of these errors stem from myths or assumptions about how private company structures work. To help clear things up, the ATO has launched a helpful new webpage: Division 7A Myths Debunked, covering common misunderstandings around business structure, record-keeping, and payments to others.
Need Clarity Around Division 7A?
The rules around Division 7A are complex, and simple mistakes can be costly. If you’re unsure whether your company is compliant, or if you need help putting the right loan agreements and documentation in place, our team can guide you through the details. Contact us today.
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