Shareholders & Directors – Have you taken a loan from your company ?
24 October, 2022

Shareholders & Directors – Have you taken a loan from your company ?

You may be considered to have taken Div 7A loan from your company if you (or your related party) have taken money from your company that isn’t the following:

  • Dividend
  • Wages
  • Reimbursement of expenses or
  • The money you’ve previously paid into or loaned the company

As an owner or director of a company, you are entitled to take a loan from your company however, it has many tax implications as well so, it’s important to understand the tax consequences of taking directors loan in a company.

Under Division 7A of the Income Tax Assessment Act 1936, any shareholder or director’s loans should be established through a formal loan agreement that details repayment terms and interest charges.

Div 7A loans are repayable (generally in 7 years) along with interest calculated at ATO’s benchmark rate.

Div 7A loan may be repaid by declaring a dividend equal to the required minimum repayment before the end of each financial year so there is no actual repayment of cash to the company.

If the minimum repayment on a director’s loan is not made by the due date, the deficit amount is taxed as an unfranked dividend (Div 7A dividend) to the loan recipient in that financial year under Division 7A rules.

It is important to note that a payment or other benefit that’s potentially subject to Division 7A isn’t treated as a Division 7A dividend if it’s repaid or converted to a complying loan by the company’s lodgement day for the income year in which the payment occurs.

How to avoid Div 7A:

  • don’t pay private expenses from a company account
  • keep proper records for your company that explain all transactions, including payments to and receipts from associated trusts and shareholders and their associates
  • if you lend money to shareholders or their associates make sure it’s on the basis of a written agreement with terms that ensure it’s treated as a complying loan – so the loan amount isn’t treated as a Division 7A dividend.

Get in touch with us today, if you have any questions or need guidance for compliance with Div 7A loan.

Disclaimer: This article is provided as general information only and does not consider your specific situation, objectives, or needs. It does not represent accounting or tax advice upon which any person may act. Implementation and suitability require a detailed analysis of your specific circumstances. Before taking any action, consider your own circumstances and seek professional advice.

Please contact us for advice specific to you and your circumstances.

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