As a business owner or shareholder, it’s important to understand how you can access company funds without triggering costly tax penalties. Division 7A of the Australian Taxation Office (ATO) rules ensures that certain payments or loans from private companies to shareholders are treated as taxable dividends, preventing tax avoidance. However, there are many myths around Division 7A that could lead to financial consequences if misunderstood.

Here’s what you need to know to stay compliant and avoid common pitfalls.

1. The Company’s Money Is Not Your Money

Many business owners mistakenly think they can access company funds as if they were personal funds. This is not the case. The company is a separate legal entity, and its funds should not be accessed freely without proper documentation and tax implications. To avoid penalties, use formal channels like salaries, dividends, or directors’ fees when accessing company funds.

2. Record-Keeping Is Crucial

The ATO insists on detailed documentation for every transaction involving company funds. Simply noting transactions in a journal isn’t enough. You need clear, formal records that justify each distribution or payment to a shareholder. Failing to keep proper records is one of the top reasons businesses fall into Division 7A compliance issues.

3. Interposed Entities Won’t Save You

Some business owners try to bypass Division 7A by using trusts or other entities to funnel payments. The ATO has made it clear that if the distribution ultimately benefits the shareholder, it will still be treated as a taxable dividend, regardless of the intermediary.

4. Temporary Loans Won’t Work

If you try to avoid tax liabilities by quickly repaying loans just before tax deadlines, you might find that the ATO considers those repayments as temporary, especially if new loans are taken out immediately afterward. This can lead to deemed dividends and increased tax obligations. Always have structured, long-term repayment plans in place to avoid this issue.

5. Don’t Rely on the ATO’s Discretion

It’s a common misconception that the ATO will overlook Division 7A breaches if you can justify them with professional advice or good intentions. The ATO is strict about enforcement, and while the Commissioner has discretion, it’s not something you should count on. Make sure you’re following the rules to avoid any surprises.

How to Stay Compliant

To stay compliant with Division 7A and avoid unnecessary penalties:

  • Use proper channels (e.g., salaries, dividends, directors’ fees) to access company funds.
  • Document everything clearly and accurately.
  • Avoid shortcuts, like temporary loans, that might not hold up under ATO scrutiny.
  • Seek professional advice if you’re unsure, but remember that it won’t guarantee leniency from the ATO.

By following these steps, you’ll keep your business on the right track and avoid unexpected tax consequences.

Contact Advisory One today to get help with your business – call us on 02 6324 5888