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Avoid tax pitfalls, take the company’s money out wisely

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The Australian Taxation Office closely examines specific transactions that taxpayers frequently get incorrect. One of the most prominent examples is blurring the distinction between the company’s and the owner’s money. The ATO will treat such payments as un-franked dividends, which is usually a bad outcome for both the corporation and the shareholder.

The fuzzy border between the company’s money and the owner’s money is an area that frequently gets firms in trouble. There are complex tax regulations in place to ensure that businesses understand the distinction, and the ATO enforces those laws with zeal. These laws are enshrined in Division 7A of the 1936 Tax Act and are so generally referred to as the Division 7A rules. Division 7A only applies if payment or loan is not repaid by the due date of the company’s tax return. Here are a couple of transactions that ATO is looking for:

-Using company assets to pay for personal expenses.

-Without a loan arrangement, firm lending distributes cash to shareholders, etc.

Payments made to shareholders that are not considered as un-franked dividends include -payments made against a legitimate debt due, payments assessable under another Act provision or payments done in the position of an employee, etc.

The ATO will take notice if shareholders withdraw funds from their private firm without classifying it as a dividend or a loan. There are two forms of Division 7A loan agreements- unsecured loans with a maximum term of seven years and secured loans with a mortgage over real property. One must ensure that any money borrowed or otherwise received from the company during the year is either repaid or offset against other amounts owed by the company or put in place a complying loan agreement before filing your company’s tax return. In the case of a loan agreement, it should be:

-In a written format

-Should include the lender’s and borrower’s names

-Should include all of the loan’s main terms, such as the loan’s principal and the obligation to repay the debt

If the correction is not made before the firm’s lodgement date, Division 7A will consider the company to have paid an un-franked dividend to that shareholder, which must be declared in the recipient’s tax return and is taxed at the highest marginal rate of 45 percent. The government wants to amend the regulations so that there is only one form of complying loan agreement. It will consist of a 10-year unsecured loan, interest rates on Division 7A loans will be rising by approximately 2%, and a modification in the method through which minimum annual repayments are determined. Also, the distributable excess rule will be repealed.

In case you are affected by such a problem we advise you to consult your accountant or financial department. They will assist you with some way out of it. And as a precaution avoid certain mistakes like having a 25-year property agreement but failing to register a mortgage, failing to repay the loan, keeping poor records, etc. Be cautious of minute things and work honestly, that is what going to help you work without any legislative barriers.

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