Division 7A continues to be a high-risk area for private groups and family businesses. The ATO’s attention on private company loans, unpaid present entitlements (UPEs), and related-party arrangements is sharper than ever. Accountants need to ensure compliance to avoid unintended deemed dividends and associated tax consequences.
Key Areas to Watch
1. Unpaid Present Entitlements and Sub-Trust Arrangements
- The ATO continues to focus on UPEs from trusts to private companies, especially where sub-trust arrangements are used.
- Ensure UPEs are either paid out, placed on compliant Division 7A loan terms, or dealt with under the ATO’s guidelines to avoid deemed dividends.
2. Loan Agreements and Minimum Repayments
- Review all related party loans for compliance with Division 7A requirements:
- Written agreements in place
- Benchmark interest rates applied
- Minimum yearly repayments observed
- Failure to meet minimum repayments by the due date will trigger a deemed dividend, taxed at the shareholder’s marginal rate.
- Watch for errors in calculating repayments, especially where loans are refinanced, consolidated or payments are made or dividends declared during the year.
The ATO has increasingly used section 109R anti-avoidance provisions to treat repayments incorrectly classified as new loans as non-compliant, causing non-compliance and large tax issues for clients.
3. Interposed Entities and Circular Transactions
- The ATO is targeting structures involving interposed entities (such as trusts or bucket companies) that may be used to circumvent Division 7A.
- Circular arrangements or back-to-back loans designed to avoid minimum repayments or extend loan terms are high risk.
Key Takeaways
- Division 7A is complex and unforgiving; minor oversights can result in significant tax consequences.
- Regular planning, review, and robust documentation are essential.
- Proactive management of UPEs, loans, and interposed entities is critical to reduce risks.
Conclusion
Careful Division 7A compliance is essential for private groups and family businesses. By reviewing arrangements, documenting properly, and seeking expert advice early, accountants can safeguard clients against costly ATO penalties and unintended tax outcomes.
If you’d like to discuss Division 7A strategies or have questions about current ATO focus areas, please get in touch. Vale Legal can conduct a Division 7A health check for all private company clients to ensure compliance and reduce risks associated with Division 7A loans to a maximum extent.
