Withdrawing money from your company – Div 7a – Importance of Tax Planning Accountants Beenleigh

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Division 7A of the Income tax Assessment Act (ITAA36)

It is common knowledge that where a private company makes a loan to a shareholder or their associate a potential deemed dividend issue arises under Division 7A.  The shareholder has until the due date of lodgement of the tax return to repay the loan in full or enter into a loan agreement.
If a loan agreement is entered into, the taxpayer has until the end of the first year after the year the loan was made to make a repayment.
The minimum yearly repayment is calculated on the balance of the loan using the benchmark interest rate and the term of the loan.  However, where the loan has a payment made prior to lodgement day then the interest is pro rata’d.  In addition, the payment made before the lodgement date does not count towards the minimum yearly repayment

Example

Reducing loan balance for pre-lodgment day payment.
On 15 august 2009, Viking Pty Ltd made a $100,000 loan to Annie, a shareholder in the company. The loan was made pursuant to a loan agreement that satisfied the requirements of S.109N Annie had made no repayments as of 30 June 2010.
However, she repays $25,000 on the 15 December 2010 which is prior to the company’s lodgment day of 1 March 2011.
What is the closing balance of Annie’s loan as at 30th June 2010?
Because S.109E(3) allows the $25,000 to be taken into account, the closing balance of the loan as at 30June 2010 is not the $100,000 she originally borrowed but $75,000 (ie, $100,000 – $25,000)
What is the MYR that Annie must make by 30th June 2011
Based on the closing balance of the loan and the other variables contained in the formula in S.109E(6) the MYR is $14,1111. However, if the MYR were based on $100,000 it would be $18,815. Note that the benchmark interest rate for 2011 is 7.4% p.a.

Example

Correctly calculating interest in year two of the loan 

Valerie is a shareholder in Aromas Pty Ltd the company’s lodgement day for the 2010 tax return is 1st March 2011. The following loan transactions occur.

Date                       Transaction                DR                    CR                     Balance

1st Aug 2009          Loan To Valerie           $50,000                                           $50,000

1st Sep 2010          Repayment                                         $10,000                  $40,000

1st June 2011        Repayment                                           $5,000                   $35,000

30th June 2011      Interest                         $3,055                                          $38,055

What amount if the MYR for 2011 based on?

$40,000. The $10,000 repayment on 1 September 2010 is counted as it was made before ‘lodgment day’ the MYR is $7,526.

Has Valerie made the MYR?

YES. Both the $10,000 and $5,000 repayments made by Valerie during the 2011 year are taken into account. As the total payment of $15,000 exceeds $7,526 the MYR is covered.

What is the closing balance of the loan for the 2011 year?

To work this out it is necessary to calculate the interest charge for the year. Note, interest does not begin to accrue until 1st July 2010. The benchmark interest rate is 7.4% p.a which is 0.020273973% per day.

When do the new dividend rules apply from?

The rewritten s.254T applies to all dividends declared on or after 28th June 2010, it will not apply to dividends declared before this time but paid on or after 8th June 2010.

Posted in Asset Protection

Private Company Loans – (Loans to shareholders – Division 7A) by Claire Chapman

Loans to shareholders (paid outside ordinary wages and dividends eg ‘drawings’) made by private companies can be deemed to be dividends unless they meet strict requirements.  The ATO is focusing risk review and audit activity on loans to shareholders.

The documentation and repayment requirements are very strict.  Tax planning provides an opportunity to review these issues prior to year end and also plan for dividends that you may need to declare personally to meet the minimum repayments.

We are seeing an alarming increase in the number of clients taking large drawings from their companies with no tax planning to deal with it.  When they bring their historical information in to us to prepare the tax returns, it is too late to do anything about it and as a result they are left with very large tax bills.

DIRECTORS’ LOAN ISSUES

There are strict laws and regulations in place to prevent directors, shareholders and their associates of private companies withdrawing amounts from those companies for private purposes.

The only means by which a company can pay amounts to directors, shareholders or associates are as follows:

  • Wages (if the person is an employee of the business)
  • Directors fees
  • Dividends (either franked or unfranked)

Wages and Directors’ Fees
The company may be able to pay amounts out as wages or directors fees where the person is employed in the business. It is important to note that if they are classified as employees, all entitlements relevant to other employees will also apply. E.g. Compulsory superannuation contributions will be required to be paid and the company will be required to withhold tax on the payments and declare this to the tax office. They will also need to include these amounts in their calculations for workers’ compensation insurance premiums.

Dividends
For shareholders, the company can declare and pay dividends to distribute the profits. Preferably these would be franked dividends, however this will be dependent on the amount of tax credits available in the company.

Wages, directors’ fees and dividends will need to be declared as income in the personal income tax return of the director or shareholder.

Under limited circumstances, the company may enter into a loan agreement with the director or shareholder for the amount to be repaid. Under these circumstances, the parties must have a written loan agreement (prepared by a solicitor) and the loan must be repaid within 7 years from the date that it commenced. In addition, the company is required to charge interest on the loan and there will be tax payable on this interest. Also the director or shareholder is required to make a minimum repayment each year as calculated by the tax office.

Failure to comply with these regulations can result in severe penalties being imposed on the company, directors, shareholders or associates. This may result in them being liable to pay significantly higher amounts of tax than they would otherwise be liable for..

It is important that clients contact us to discuss their circumstances prior to withdrawing any amounts from their company for personal purposes.

Posted in Tax