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Division 7A loans, debt forgiveness and other payments explained

As a shareholder, you are likely familiar with dividends, when a business gives a shareholder loans or benefits that can also be treated as a dividend for income tax purposes. Division 7A is a provision of the Income Tax Assessment Act 1936 that is meant to prevent these dividends from being tax-free.   

So, what is Division 7A, and when does it apply to businesses and shareholders?

What is a Division 7A loan? 

Division 7A is part of the Australian Income Tax Assessment Act 1936 that applies to certain payments, loans and debt forgiveness to prevent private companies from giving tax-free profits to shareholders. 

If the loan does not meet the Division 7A requirements, it could be treated as an unfranked dividend and be subjected to income tax when passed to the shareholder. This is to prevent private companies from distributing profits to shareholders without paying the correct income tax. 

All of the requirements must be met to be considered a Division 7A loan:

  • There must be a written loan agreement before the business’s tax lodgment day for the year the loan was paid.
  • The agreement should identify the lender and borrower.
  • The agreement should be signed and dated by the lender.
  • It should state essential conditions of the loan like the amount of the loan, the date it was drawn down, the interest rate payable etc.
  • The interest rate of the loan must be at least equal to the Division 7A benchmark interest rate.
  • The terms of the loan cannot exceed 25 years if 100% of the loan is secured by a registered mortgage over the value of the property, where the market value of the property is at least 110% of the amount of the loan.
  • The term of the loan cannot exceed 7 years if it doesn’t meet the requirements stated in the above bullet point.  

If it does not meet the above conditions the loan could be considered a Division 7A dividend

As a shareholder, you will also need to make sure that the loan minimum yearly repayment is made each year. If this repayment is not fully made for each year then the shortfall amount would also be treated as a Division 7A dividend for that year.

A Division 7A deemed dividend is typically unfranked, so a way to provide a payment or other benefit to a shareholder is to pay it as a normal dividend (with a franking credit) and for the shareholder to include it in their assessable income.

Division 7A interest rate

The Division 7A interest rate is set by the Australian Taxation Office (ATO) every financial year, based on the benchmark interest rate set by the Reserve Bank of Australia (RBA) plus an additional margin of 7%.

You can also use the ATO Division 7A calculator to estimate the minimum yearly repayment you’ll need to make on your loan, including: 

  • Minimum yearly repayment required on a loan.
  • Interest payable to the lender for the income year
  • Amount of the loan not repaid by the end of an income year (closing balance)

Before using the ATO calculator, you’ll need to gather the following information: 

  • The income year in which the loan was made
  • Amount of the loan not repaid by the end of the previous year of income
  • The actual term of the loan
  • Date and amount of any repayments attributable to that loan

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When does Division 7A apply? 

Division 7A applies when a company provides payments or other benefits to a shareholder which isn’t treated as a salary, wage, or dividend

Division 7A loans can include:

  • An advance of money
  • A payment to a shareholder which they have to repay
  • Credit or other forms of financial accommodation

If Division 7A applies, the payment, loan or other benefits will be treated as an unfranked dividend and subject to income tax once passed to the shareholder. 

To determine whether Division 7A applies, consider the following:

  1. Is the payment or benefit made by a private company? 
  2. Is the payment or benefit made to a shareholder or their associate? 
  3. Is the payment or benefit a loan that has not been repaid within the specified timeframe, or is it repaid with a lower interest rate than the Division 7A benchmark interest rate?
  4. Is the payment or benefit for the personal expenses of the shareholder?
  5. Is the payment or benefit debt forgiveness provided to the shareholder?
  6. Is the payment or benefit for an asset or property provided to the shareholder for less than its market value?

If the answer to any of the above questions is yes, Division 7A likely applies, and you should seek professional advice to ensure compliance with the law.

How QuickBooks can help

Quickbooks has various features designed to help you as a shareholder with your tax filings, including automated data pre-filling, broad system integration, and intelligent error-checking technology, so you can meet your compliance obligations every time. 

Using the QuickBooks mobile app, you as a shareholder can conveniently track your expenses in real-time and access your finances on the go, making tax filing day as easy as possible.

Streamline your shareholder tax filings with powerful accounting software by signing up for QuickBooks with a 30-day free trial and start to simplify your tax filing process today.

While every care has been taken to ensure the accuracy of the information presented as at 12 April 2024, Intuit is not providing you with professional advice and we recommend you obtain your own professional advice. Intuit is not liable for your use of the information presented.


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