Then you need to be aware of Division 7A
If you’ve ever taken money (other than wages or directors fees) from your company then Division 7A will affect you. Its purpose is to ensure that private companies can no longer make tax free distributions of profits to shareholders or shareholders’ associates in the form of payments, loans and debts forgiven.
If you take money from your company and these loans are not repaid or put on a commercial footing ie interest and repayments made against these loans, you will be deemed to have received a dividend from the company. This dividend will generally be unfranked.
An amount may also be treated as a dividend even if it is paid or lent by the company to the you or your associate through one or more interposed entities.
Treatment of these loans as dividends will make the amounts assessable income in your hands. This means you will have to pay tax on the full amount of the money taken from the company.
So what do you need to do to avoid Division 7A?
You must either ensure all loans are repaid to your company before the end of the financial year or put the loan on a commercial footing (by paying interest and repayments). With 30 June 2016 only 5 months away, it’s never too early to start repaying these loans now.
Kim Jay CA – Director