Accountant’s Foundation: Professional Firm Profit (PFP)
What is PCG 2021/4? PCG 2021/4 is a practical compliance guideline regarding the allocation of...
What is Div7A
A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A, even if the participants treat it as some other form of transaction such as a loan, advance, gift or writing off a debt. This can be the case even if the participants consider it as some other form of transaction, such as a loan, advance, gift or writing off a debt. It can also apply when provided through another entity, or if a trust has allocated income to a private company but has not actually paid it, and the trust has provided a payment or benefit to the company's shareholder or their associate.
Division 7A doesn't apply to amounts that are assessable to the shareholder or their associate under other parts of the income tax law, such as normal dividends or director's fees.
Payments or benefits that fall within the scope of Division 7A are not treated as dividends if they are repaid or converted into a complying Division 7A loan by the company's lodgment day for the relevant income year. A Division 7A loan must be repaid over a term of 25 years if secured by property or seven years for all other loans.
Why is Div7A Important?
From the 1st of July 2024, the Australian Tax Office increased the interest rate on Div7A loans from 4.77% to 8.27%, possibly representing a hefty repayment increase for some.
On top of that, the ATO are aware that compliance around Div7A is not great and are turning their attention to addressing that.
Key Steps for Dealing with Div7A
Educate Your Clients
The ATO expects that Accountants are educating their clients on any relevant requirements
Consider the Options for Your Client
The ATO also expects Accountants to provide their clients with the best information to comply. Depending on their situation, there could be a few relevant strategies, including making higher repayments. (For a list of strategies to consider, see the Helping Your Clients Prepare for Div7A article.)
Empower Your Clients to Make Informed Decisions
Your clients need to be taken on a journey of what their options are to be able to navigate their way through this. It reduces your risk and helps them understand that what you've provided is complicated and worth their money.