Division 7A is a complex tax rule that affects business owners of all sizes, from small businesses to large private wealth groups. The rule ensures that company funds or benefits provided to shareholders (or their associates) are treated as taxable income unless properly managed. 

The ATO has published a Divison 7A information sheet on its website, debunking common myths and addressing frequent misconceptions. In this article, we’re sharing our top tips for staying Division 7A compliant and avoiding unexpected tax liabilities 

What’s Division 7A, and why does it matter? 

Division 7A applies to private companies and aims to prevent shareholders from accessing company profits without paying the appropriate tax. For example, if you borrow money from your company or use company funds for personal expenses without meeting certain conditions, the ATO may treat this as a dividend and tax it accordingly. 

If you’re a business owner, it’s important that you understand Division 7A so you can avoid unexpected tax bills, penalties, or complications with the ATO. By managing your company finances carefully and following the rules, you can reduce risks and ensure you stay compliant.  

5 practical tips to reduce Division 7A risk 

1. Avoid using company funds for personal expenses 

Why? Division 7A treats personal use of company money as a loan, which can trigger extra tax. 
 

How to implement:  

  • Maintain separate bank accounts and credit cards specifically designated for personal and business transactions. 
  • Use a director’s salary or dividends for personal spending instead of dipping into company funds. 

2. Create and follow a budget for business and personal spending 

Why? A clear budget will help you avoid accidentally overspending or dipping into company funds, significantly reducing the risk of a Division 7A breach. 
 

How to implement:  

  • Remember that a budget is not a ‘set and forget’ exercise! Review your business and personal budgets regularly, ideally monthly, to ensure your spending aligns with your plan and available cash flow. 
  • Adjust your budgets as needed based on changing circumstances, and be realistic about your personal drawing needs. 

3. Pay dividends instead of loans 

Why? Properly declared dividends are not subject to Division 7A rules, making them a cleaner way to access company profits. 
 

How to implement:  

  • Work closely with your accountant to declare dividends properly.  
  • Consider the tax implications for both the company and shareholders. 

4. Maintain detailed, accurate and organised records 

Why? Precise and accurate records ensure you can prove compliance and help you to avoid issues with the ATO. 
 

How to implement:  

  • Document all loans, repayments and shareholder transactions in detail, including dates, amounts, purposes and terms.  
  • Use a reliable accounting software program to record transactions and ensure documentation is complete and readily accessible for audits.  

5. Schedule a pre-year-end review with your accountant 

Why? Identifying and addressing potential Division 7A issues before the end of the financial year can help you avoid tax penalties and compliance headaches. 
 

How to implement:  

  • Meet with your accountant 2-3 months before June 30 to review loans, repayments and company transactions.  
  • Develop a strategic plan to address any Division 7A concerns, including dividend declarations and repayments, to ensure you stay compliant. 

Get expert help with Division 7A 

Navigating Division 7A can be challenging, but our knowledgeable team is here to help. We can review your company’s finances, identify potential risks and develop strategies to keep you compliant. 

Reach out to our team for a complimentary initial discussion by: 

  • calling us on 03 5221 6399  

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This article was written by Tax and Business Services Director Kylie McEwan.  

Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals.