Using company money and assets for personal use or benefit?

Posted 24 Jul

Using company money and assets for personal use or benefit

The Australian Taxation Office (ATO) regularly publishes focus areas for small businesses. One of the top areas where the ATO regularly sees errors is where a private company shareholder or associate uses business money and assets for personal use or benefit, which can lead to Division 7A issues.

What is Division 7A?

Division 7A is an anti-avoidance rule designed to stop the profits or assets of a private company from being provided to its shareholders or their associates tax free. Think of a small business shareholder using a company credit card to pay for their child’s school fees, or using company money to pay for a holiday.

If a shareholder uses company money for private purposes and doesn’t do anything to resolve the situation, then Division 7A can step in to treat those amounts as unfranked dividends, which are taxed in the shareholder’s personal tax return at their own marginal rate.

Common misunderstanding can lead to errors

One of the most common Division 7A errors the ATO sees is caused by shareholders and their associates not understanding that a company is a separate legal entity. This legal separation means that a company’s money and assets are its own, and should not be ‘dipped into’ by shareholders (and if they are, such amounts should be paid back within the relevant time). This is another reason why you should have separate bank accounts or credit cards for private and company expenses, to make it easier to distinguish between private and business expenditure.

How to avoid Division 7A issues

Besides paying back the amount in full, another common way to avoid a Division 7A issue is to borrow the amount as part of a complying loan agreement.

There’s no set format to a complying loan agreement, but it should be in writing and contain at least:

- Identity of the borrower and lender

- Loan amount

- The requirement to repay the loan

- Interest rate payable (no less than the Division 7A benchmark rate)

- Term of the loan (generally up to 7 years, unless the loan is secured by a registered mortgage over real property)

 A complying loan agreement must be signed and dated before a company’s relevant lodgment day for the income year in which the loan was paid.

Don’t get caught out by Division 7A

Have questions about Division 7A? Arrange a time to speak with a member of our team. We can make sure that you’re meeting all Division 7A obligations, including meeting complying loan requirements.

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