Is there any trouble with using your business assets on your own personal use? Assets that belong to the company and are used for your own use or entertainment could possibly lead to a taxation issue referred to as “Division 7A”.
The operating structure of your small business might be set up by the accountant as a company for getting all of the “asset protection” benefits using a corporate veil. Even so, being a private company with the majority of the company directors and shareholders being friends or family, business decisions may be easily manipulated to profit individuals. This isn’t however always deliberate as many people think of business assets as their own. However, taking into consideration the company income tax rate is 30% (or 28.5% in certain situations), and the maximum individual marginal tax rate is 49%, you will get some tax respite from this arbitrage. Division 7A is intended to avoid this tax avoidance.
What is Division 7A?
Division 7A treats a transaction or any other benefit supplied by a private company to the shareholder (or their affiliate) as being a payment for income tax purposes. This integrity measure may apply even when the individual treats the transaction as a present, or perhaps a loan, or even the waiving of the debt.
The Division 7A net is broad, and could possibly catch numerous transactions that, in substance, don’t include a distribution of income, for instance utilizing a company’s property for personal use. The meaning of “payment” is widened to incorporate the availability of assets.
Can this occur if I use company resources for private use?
That is right. Actual physical assets will be at the greatest exposure you might have, with Division 7A without realising it.
For instance: a holiday house that is owned by a firm but is utilized by the shareholder of the corporation. Value of this use, under Division 7A, may be considered as a dividend and form a part of the shareholder’s assessable income. There are specific exceptions that could apply however – for instance, when the property was being utilized as a primary residence. Consult our expert Small Business Advisors and Accountants at 1300 300 106 for additional details.
Be Careful for Motor Vehicles
Yet another relatively frequent instance concerns motor vehicles, however they are most probably caught by fringe benefits tax (FBT) instead of Division 7A due to the fact those cars are generally given to company directors in their capacity as employees in spite of those company directors being shareholders .This will begin getting fairly complicated, so make sure you speak with our expert Cranbourne accountants in case you have cars used in this way by shareholders, company directors and employees.
One particular outcome from the ATO’s current ramping of its data matching actions is a greater triggering of both Division 7A and FBT provisions, after cars registered to companies have been discovered to be used privately by shareholders or employees.
In case your dealings are subject to Division 7A, you might also need to consider some other aspects of taxation, including FBT, concerns relevant to share dividends or family law.
Fringe Benefits Tax
Division 7A will not affect payments made to shareholders or their affiliates in their capacity as an employee or being an affiliate of the employee of a private firm. Nonetheless, these kinds of payments might be subject to FBT.
On the flip side, Division 7A applies to loans and debt forgiveness made available to shareholders or their affiliates, even where these kinds of benefits are offered in their capacity of being an employee or for an affiliate of the employee. To prevent dual taxation, these kinds of benefits will not be subject to FBT.
Dividend Imputation, Franking Credits
Payments as well as other benefits taken to be Division 7A dividends are usually unfranked distributions except in cases where these are given under a family law obligation. Even so the ATO has a general discretion to permit a Division 7A dividend to be franked when it occurs due to a genuine error or accidental omission.
Payments and other benefits offered by a non-public company to shareholders or their affiliates resulting from separation and divorce or any other relationship breakdowns might be treated as Division 7A dividends and therefore are assessable income of the individual. Having said that this kind of payment or any other benefits are treated as franked dividends if paid under a family law requirement, like an order from the court, a maintenance arrangement approved by a court under the family law act or court orders in relation to a de facto relationship breakdown.
Call our expert Cranbourne Accountants and Cranbourne Tax Agents on 1300 300 106 to find out how you might be affected.