QUESTION: I need to tell my clients what has happened with Division 7A -- loans from the company to mum & dad. You mentioned back a few years ago that these were the biggest negligence problems for accountants. You proved to be right with some of my colleagues getting attacked by clients that paid almost 100% tax on Div 7A breaches. Can you, in just 4 minutes, let me know the new changes so that I can cut and paste it into my client newsletter. I know that you still have concerns with Div 7A. I need to get that information to my clients, to protect myself.
ANSWER: Every client with a company has a potential negligence case against your practice. There are 4 main changes:
What happens if your company loans you money but forgot to do a Div 7A Loan Agreement in time? Normally, your company loses its 30% imputation credit and then you have to pay tax again at your full marginal tax rate. But thanks to the new laws, now there is no penalty if it was an "honest mistake or inadvertent omission". This is because the Australian Tax Office (ATO) uses its discretion to either (a) disregard the deemed dividend (subject to you doing the Div 7A loan agreement), or (b) allows your company to pretend it was a dividend.
The removal of automatic debiting of "franking account". What is a "franking account"? When a company pays its tax (30%) that information is stored in the companies' accounts. When it comes to pay a dividend it gives that paid tax value to the shareholder. This means that if you get a dividend that is fully taxed then the first 30% has been paid on it already. If you tax rate was say 46.5% (highest human being rate) then you only pay 16.5% tax.
Let's say you have a Div 7A Loan Agreement. But what happens if you miscalculate your minimum yearly repayments? If the loan falls short of the required amount by the due date, the amount of the deemed dividend that arises is the amount of the shortfall in the income year. It used to be 100% of the total loan. Now it is just the shortfall.
You can also now refinance some loans without triggering a deemed dividend.
The Tax Laws Amendment (2007 Measures No 3) Act 2007 introduced some important changes to the operation of Div 7A. Among those changes were:
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