KEY CONSIDERATIONS
□ Know your shareholders and associates
Have a clear understanding of who falls under the definitions of ‘shareholder’ and ‘associate’ within the scope of Division 7A. This includes relatives, spouses, trusts and other entities where shareholders exercise significant control.
□ Understand the risks
If a private company provides a payment, loan, debt forgiveness or even allows for the use of company assets to a shareholder or associate, it could be deemed an unfranked dividend and result in substantial tax liabilities.
□ Professional support
Consult an accountant or tax advisor to help you understand Division 7A and its potential impact on your business transactions.
ESSENTIAL RECORD KEEPING AND DOCUMENTATION
- Meticulous records
Maintain detailed records of ALL transactions between the company and its shareholders and associates.
This includes:
- Payments of any kind (drawings, salaries, reimbursements etc)
- Loans (both to and from the shareholder/associate)
- Debt forgiveness
- Use of company assets (eg property, vehicles)
□ Supporting evidence
Every transaction must be backed by clear documentation such as invoices, loan agreements, board minutes authorising actions or asset usage agreements.
FORMALISING LOAN AGREEMENTS
□ Written agreements are mandatory
Any loans between the company and its shareholders /associates require formal written Division 7A compliant loan agreements. These agreements must include:
□ Minimum interest rate – At or exceeding the ATO benchmark rate.
□ Maximum term – Usually 7 years (25 years in specific circumstances).
□ Clearly defined repayment schedule – Stipulating minimum yearly repayments.
□ Stay updated on interest rate changes
Periodically review the ATO benchmark interest rate and adjust your loan interest rates to maintain compliance.
BEYOND THE LOAN AGREEMENT – KEY COMPLIANCE PRACTICES
□ Meet your repayment obligations
Strictly follow the repayment schedule outlined in your loan agreement. Missing payments can render the agreement void and potentially trigger Division 7A issues.
□ Document everything
Maintain detailed records of all loan related transactions including payments issued, interest accrued and charged and any adjustments made due to interest rate changes.
BEYOND THE LOAN AGREEMENT – KEY COMPLIANCE PRACTICES
□ Regular reviews
Partner with your accountant or advisor to conduct periodic reviews (eg annually) and assess your company’s Division 7A position.
□ Addressing issues head on
If you discover any potential non-compliance or past discrepancies, immediately seek professional guidance to rectify the situation and potentially disclose the issues to the ATO.
□ Knowledge is power
Educate yourself, your fellow shareholders/directors and advisors on the fundamental principles of Division 7A to minimise risks.
□ Monitor for changes
Stay informed about ATO resources, announcements and any updates related to Division 7A rules or interest rates.
Important reminders
□ This is a guide – not a substitute
This checklist provides general guidance. Your business’s specific circumstances require tailored advice from a qualified accountant or tax advisor.
□ Proactive compliance matters
Accurate record keeping, timely reviews and a detailed oriented approach in all transactions with shareholders/associates are essential for protecting your business and avoiding costly Division 7A complexities.
By diligently applying this checklist to your business practices, you’ll significantly enhance your Division 7A compliance posture and ensure that your company operates confidently within the boundaries of tax law.