The Hidden Tax Time Bomb in Your Company (Division 7A)
Running your business takes hard work. The last thing you need is trouble with the ATO.
Right now, the ATO (Australian Taxation Office) is cracking down on small businesses for breach of Division 7A of the Income Tax Assessment Act 1936, by using money and assets belonging to a business company for personal use or benefit.
Here’s everything you need to know.
The cost of a Division 7A Breach
Take John, the sole proprietor (and top employee) of a carpentry business in Brisbane which runs through a company structure.
John used his company credit card to pay $20,000 in school fees and a $15,000 family holiday.
John reasoned – as the sole owner – it’s his money and he thought nothing more of it.
2 years later, the ATO called this $35,000 “unfranked dividends” and carried out an audit.
John had to declare an extra $35k in his tax return, and pay tax at his personal tax rate. He got no credit for the tax his company already paid.
How business owners are affected by Division 7A
If you draw from your company for personal use and there is not a formal Div 7A loan in place, the ATO calls it a “dividend”.
That makes it taxable income for you separate from your other income sources.
That means you can’t just take money out of your company bank account. You have to follow the proper steps, otherwise you might face Division 7A action from the ATO.
Common mistakes that lead to Division 7A breaches
Many business owners face action every year for unintentionally violating Division 7A.
Here are the most common reasons why:
- Using one bank account or credit card for business and personal costs, making it difficult to distinguish between them.
- Taking the company car, tools, or property, home without proper records
- Poor bookkeeping that can’t explain where money went
- Borrowing money from your business or partners without proper loan agreements which include paying back interest to the company.
- Missing loan repayment deadlines
Simple steps to stay safe
Here are 5 best practices we use to help clients avoid Division 7A pitfalls:
- Keep separate bank accounts for business and personal use
- Track every business expense with proper records (and proper recordkeeping)
- Set up proper loan agreements when taking money out of the business if you can’t repay it
- Make loan repayments on time to avoid triggering audits
- Declare withdrawals efficiently to minimize taxes
Facing (or worried about) Division 7A Compliance Breach?
If you’ve received a letter from the ATO, don’t lose heart. There may still be time to recover and minimize the damage.
(If you haven’t received a letter, take precautions and don’t wait for one to arrive.)
The ATO offers free online courses and webinars to help business owners stay compliant.
If you don’t have time to learn, we may be able to help.
Our speciality is helping Brisbane’s business owners grow their family wealth through lower taxes, stronger profits, and better asset structure.
Contact us for a free consultation.
