Director loan and Division 7A
If a Director or Shareholder take money out of the company or use its assets for private purposes, an unfranked, deemed ‘Division 7A’ dividend can arise.
This applies whether or not the company has banked the money (cash) before the directors use it.
– The company cannot claim a tax deduction for the dividend and cannot frank the dividend.
– You (shareholder or shareholder’s associate) will have to declare the dividend as income on your individual tax return. You may have to pay income tax on the unfranked dividend.
To avoid unintentionally being in this situation:
– if you take money out of the company or use its assets, make sure you properly account for it as salary or wages, a fringe benefit, dividend, or complying loan before your company’s lodgment date
– set up a separate bank account for your company, use it to pay for
company expenses and don’t use it to pay for your private expenses
– keep proper records to explain all of your company’s transactions, including all income, payments and loans to and from shareholders and their associates
– repay any loans you take from the company or convert them into a
complying loan before the company tax return is due or lodged (whichever comes first).
If you make an honest mistake when trying to comply with these obligations, you should tell us as soon as possible. There are
ways you can get back on track without a penalty.
If you have a trust that distributes to a company, there could be Division 7A implications.
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