The loan agreement must be signed and dated before lodging the income tax return. It should set out the essential conditions of the loan, including the amount of the loan, requirement to repay the loan, the loan term and interest rate payable (which must at least be the ATO’s benchmark interest rate) It should identify the names of the lender and borrower So, if you think you are affected, before lodging your company’s tax return make sure any money that any shareholder (or their associate) borrowed or otherwise received from the company during the year is either repaid or offset against other amounts owed by the company (for example, salary, wages or directors fees).Īlternatively, put in place a complying loan agreement including the following Story continues I’ve made one of these transactions, what do I do now?ĭivision 7A only applies where a payment or loan is not repaid by the company’s tax return lodgement date (the earlier of the day on which the company lodges its tax return, or its due date for lodgement). In this context incidentally, the definition of a shareholder also includes the associates of the shareholder, including spouse, children and business partners. Where that happens (and the situation isn’t rectified), the ATO will look to treat such payments (or loans) as unfranked dividends, which is typically an undesirable outcome for both company and shareholder. In reality, shareholders often take money out of their private company without treating it as either a dividend or a loan. Selling or exiting your small business: What it means for your taxĪlternatively, it might be a loan and if that’s the case, it should be formalised with a loan agreement on normal commercial terms. Tax and your holiday home: Look out for these ATO trapsĥ tax myths debunked – what’s true and what’s false Where a company makes a payment to a shareholder or their associate, that payment would normally be treated as a franked dividend. The laws are set out in Division 7A of the 1936 Tax Act and as a result are commonly known as the Division 7A rules. There are rigorous (and complex) tax laws designed to ensure that businesses respect the distinction between the two and the ATO polices those laws with vigour. An area that often gets small and medium sized private companies into trouble is the blurred line between the company’s money and the owner’s money. (Source: Getty)Įvery year, the Australian Taxation Office (ATO) takes a close look at the issues which tend to get taxpayers into hot water. When it comes to filing your tax, it's important that your business follows all the rules.
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