When you own and manage a company, it can sometimes be easy to think of the money in the business bank account as your own. However, a company is a separate legal entity, and money taken from the company for personal use needs to be treated correctly. In some cases, the Division 7A rules can apply and potentially treat payments or loans made to shareholders or their associates as dividends for tax purposes.

What is Division 7A?

Division 7A is designed to prevent profits held within a private company from being provided to shareholders or their associates as tax-free payments or loans.

It can potentially apply when a company:

• lends money to a shareholder or their associate
• pays personal expenses on their behalf
• makes certain other payments to them
• forgives a debt owed to the company.

If the rules apply, the amount may be treated as an unfranked dividend and included in the recipient’s assessable income.

You can read more about Division 7A on the ATO website.

Be Careful With Personal Expenses

A common issue can arise when company and personal spending become mixed.

For example, a business owner might use the company bank account or credit card to pay a personal expense. The amount may then be recorded as money owed back to the company through a director or shareholder loan account.

That does not necessarily create an immediate problem, but the balance needs to be monitored and dealt with correctly. Allowing personal withdrawals to build up over time can create Division 7A implications.

Keeping business and personal expenses clearly separated can make these transactions much easier to manage.

Can You Borrow Money From Your Company?

A shareholder can borrow money from their company, but simply recording the amount as a loan does not automatically prevent Division 7A from applying.

Depending on the circumstances, the amount may need to be repaid or placed under a complying Division 7A loan agreement before the company’s lodgment day.

A complying loan generally needs to:

• be documented in writing
• charge at least the required benchmark interest rate
• be repaid over an allowable period
• meet minimum yearly repayment requirements.

This is why it is worth reviewing shareholder or director loan balances well before the company tax return is lodged.

There Are Proper Ways to Take Money From a Company

Not every payment from a company creates a Division 7A issue.

Depending on the circumstances, money you receive from your company may instead be treated as:

• salary or wages
• a director’s fee
• a properly declared dividend
• reimbursement of a legitimate business expense
• repayment of money the company already owes you
• a properly documented loan.

The important part is understanding what the payment represents and making sure it is recorded and treated correctly.

Keep Company and Personal Money Clearly Separated

Taking money from your company is not necessarily a problem, but it is important to understand how the payment should be treated. Keeping personal and company expenses separate, monitoring shareholder or director loan balances and reviewing these transactions before the company tax return is lodged can help avoid unexpected tax consequences.

If you are unsure how money taken from your company should be recorded or whether Division 7A may apply, MKG Partners can help you review the transactions and work through the appropriate treatment.