Hello Chasers,
If you have not fully paid your trust distribution to your ‘bucket company’ beneficiary or drawn out more money from your business than permitted without paying tax, then you will be very familiar with Division 7A loans
To avoid an unfranked dividend under the Division 7A rules, loans from a private company to its shareholders or their associates must be either repaid in full or be covered by a Division 7A complying loan agreement before the company’s lodgement day.
Under complying loan agreements, minimum yearly repayments (‘MYRs’) comprising of interest and principal must be made each year, starting from the income year after the loan is made.
Taxpayers must ensure they can meet the required MYRs on complying loans. Missing the MYR or not paying enough in an income year will result in a shortfall in the MYR, which could be assessed to the borrower as an unfranked dividend.
Borrowing additional amounts from the same company, directly or indirectly, to make repayments on complying loans may result in the repayment not being considered in working out if the MYR has been made. This can also result in a shortfall in the MYR and an unfranked dividend that will be assessed to the borrower.
When making MYRs, borrowers need to:
- start repayments in the income year after the complying loan was made.
- use the correct benchmark interest rate (8.27% for the 2023/24 income year) to calculate the MYR for the current year; and
- make the required payments on the loan by the due date — the end of the income year (i.e., usually 30 June).
At our tax planning meetings we identify if you will have a potential Division 7A loan issue and help you plan for it. If you would like help in understanding this complex issue further, please contact our team on 0355612643.
Have a great day!
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