Borrowing from your business? Find out how you might be triggering the Division 7A rules
Are you a shareholder or associate of a private company?
Does your company have a distributable surplus at the end of the income year?
Do you borrow or use business assets for your personal use and enjoyment?
If you answered yes to any of these questions, then the legislative provisions of Division 7A of the Income Tax Assessment Act 1936 could potentially affect you.
What is Division 7A?
Division 7A is essentially designed to prevent shareholders and their associates from using private company profits without paying tax at their marginal tax rates.
With the highest individual marginal rate sitting at 45%, opportunistic tax planners might attempt to structure their tax affairs to access the lower company tax rate of either 30% or 27.5%. However, the anti-avoidance provisions of Division 7A operate to prevent this kind of activity.
Division 7A rules determine what kinds of benefits to shareholders and their associates are treated like unfranked dividends and therefore subject to personal income tax without any credit for company tax paid.
Does Division 7A apply to me?
You may potentially be affected by Division 7A if you are a:
Note! The term ‘associate’ in this case extends to a shareholder’s spouse, child, relative or trustee of a trust under which the shareholder benefits.
What transactions does Division 7A apply to?
Division 7A can apply to a broad range of transactions, including:
Note! An unpaid present entitlement (UPE) is a payment or distribution that you are entitled to but have not been paid.
When does Division 7A not apply?
Division 7A does not apply to:
What is a complying loan?
A loan is a complying loan if the loan has satisfied the minimum interest charge and maximum term requirement and is made or put under a written agreement before the private company’s lodgment day (currently 7 or 25 years depending on the terms).
When is Division 7A triggered?
Division 7A can be triggered if:
What is considered a payment by a private company?
A payment may include:
Note! An asset may also be available for use by a shareholder or their associate without a formal agreement or where there is no actual use.
When is a payment treated as a dividend?
A private company may be taken to pay a dividend to an entity at the end of the company’s income year if it pays an amount to the entity during the year:
What is considered a loan by a private company?
A loan may include:
When is a loan treated as a dividend?
A private company may be taken to pay a dividend to an entity at the end of the company’s income year, if it loans an amount to an entity during the year:
Transactions that will create deemed dividends
Certain transactions between a private company and shareholder or associate are deemed to create an unfranked dividend assessable to the shareholder or associate.
Payments treated as deemed dividends
Case study 1
Matt owns shares in a private company, ABC Pty Ltd. On 30 June 2017, ABC Pty Ltd makes a payment of $5,000 to Matt’s mother, Norma.
Norma is not an employee of ABC Pty Ltd and she is not an associate of an employee of the company. However, she is an associate of Matt.
The payment will be taken to be an unfranked dividend paid to Norma and she must include the $5,000 as assessable income on her 2016-17 tax return.
Loans treated as deemed dividends
Case study 2
Charlotte is a shareholder in a private company, XYZ Pty Ltd. Charlotte’s credit card bills, totalling $10,000, are paid with company cheques throughout the income year and debited to her loan account. Interest is not payable on the balance of the loan account.
If Charlotte repays the $10,000 to XYZ Pty Ltd by the end of the company’s income year, no amount should be treated as a deemed dividend under Division 7A. If she does not repay all of the $10,000, an unfranked dividend may arise.
There may be other tax implications for Charlotte and the company.
Consequences of triggering Division 7A
Generally, if Division 7A has been triggered, the shareholder would be deemed to have received a dividend equal to the amount of the payment, loan or benefit received.
What if I borrow an asset from my company for personal use?
Case study 3
Bruce is a shareholder of a private company that owns a luxury yacht. Bruce does not have a formal agreement with the company in relation to the yacht, however, he borrows the yacht and takes it out every second weekend. Bruce keeps the yacht at the company’s business premises, but takes the key home. Bruce stores his personal items on the yacht.
Bruce’s fortnightly use of the yacht is effectively treated like a payment under Division 7A. The availability of the yacht for Bruce’s use is also subject to Division 7A because the yacht is not readily available for use by the company.
The company would need to arrange with Bruce to get the key and for the removal of his personal items before using the yacht. The asset is available for Bruce’s use to the exclusion of the company.
Case study 4
Nicole is a shareholder of a private company that owns a city apartment. The apartment is generally available for rent. However, Nicole asks the company not to rent the apartment out for a week so that she and her family can borrow it over a long weekend. Nicole’s use of the apartment may be a payment for the purposes of Division 7A.
What if my company provides a loan to a shareholder?
Case study 5
Conway Pty Ltd loans $20,000 to Angie, a shareholder of Conway Pty Ltd. The money is loaned to Angie on the basis that she pays it back when she can. The $20,000 is a loan from Conway Pty Ltd to Angie because it is an advance of money. Consequently, Division 7A may apply.
Case study 6
Wayne Pty Ltd provides $10,000 to Bob, a shareholder of Wayne Pty Ltd, by way of a promissory note. The note places no obligation on Bob to repay the amount. The $10,000 is a loan from Wayne Pty Ltd to Bob because it is a form of financial accommodation. Consequently, Division 7A may apply.
What if my company provides a car for use by a shareholder?
Case study 7
Carla is a shareholder of a private company that owns five cars for company use. Shareholders and their associates have general permission to use the cars on weekends if they are not being used for company business. Carla regularly takes one of the cars home.
Carla’s use of the car that she takes home will be subject to Division 7A. This will include driving the car (actual use) and the availability of the car for her use to the exclusion of the company, such as when it is parked at home, or at a restaurant that Carla is visiting.
Although Carla may have general permission to use all five of the cars, she does not use all of them for the purposes of Division 7A. The four cars that Carla leaves at the company premises are available for the company to loan to another shareholder, employee, customer, or other party. That is, these cars are not available to Carla to the exclusion of the company.
Note! Providing cars or other residual benefits (eg a holiday house) to shareholders may be caught by FBT instead of Division 7A. Speak to your tax adviser to find out more.
Government’s proposed changes to Division 7A
The Government recently released for public consultation a paper proposing changes to Division 7A.
The proposed changes to the legislation are intended to apply from 1 July 2019 and may impact you if you are a company owner, a shareholder of a private company or an associate of a shareholder.
What do the changes mean?
The proposed changes are intended to make it easier for businesses to comply with Division 7A. The amendments will comprise:
Division 7A is always on the ATO’s radar. Speak to your tax adviser if you have been involved in transactions that you think may trigger Division 7A.
Is your business car available for private use?
A car fringe benefit occurs when your business owns or leases a car and makes it available for your employees’ private travel. In this case, directors might also be employees.
Note! Generally, travel to and from work is private use of a vehicle.
For fringe benefits tax (FBT) purposes, a car is any of the following:
If the vehicle provided does not meet the definition of a car, and your employee has private use of the vehicle, the right to use the vehicle may be a residual fringe benefit.
Providing car fringe benefits
Some examples of providing a car fringe benefit include:
Working out the taxable value of a car fringe benefit
To calculate a car fringe benefit, as an employer, you must work out the taxable value of the benefit using either:
You can choose whichever method yields the lowest taxable value, regardless of which method you used in a previous year.
Note! If you have not kept the required documentation for the operating cost method (eg log books), you must use the statutory formula method. ■
Do you import goods and services?
GST applies to most imports over $1,000. GST is 10% of the value of the goods you have imported. You generally need to pay this to the Department of Home Affairs before you can receive the goods.
There is a scheme where you can pay your GST later. This is called the deferred GST scheme (DGST), and there are eligibility requirements.
If you are registered for the deferred GST scheme, you don’t need to pay GST until after the goods are imported and you lodge your next activity statement.
If you’re registered for GST, you may be able to claim a credit for any GST paid on goods you import for your business.
What is the deferred GST scheme?
If you import goods and services, the deferred GST (DGST) scheme allows you to defer payment of GST on all taxable importations into Australia. This is subject to eligibility requirements.
Am I eligible to participate in the deferred GST scheme?
To be eligible to participate in the deferred GST scheme, you must:
When am I not eligible?
You may not be eligible if:
Imported goods under $1,000
Recently there were some changes so that GST now also applies to low value (under $1,000) imported goods, digital products or services.
If you’re registered for GST and you import low value goods for your business, you shouldn’t have to pay GST on these purchases.
4 ways to avoid simple mistakes with GST reporting
Businesses can make simple mistakes reporting their GST. To avoid errors, keep an eye out for the following common errors and ensure you report correctly.
Transposition errors can occur when an amount is manually input. These errors can be easily eliminated by double checking all figures and calculations before submitting your BAS.
You need to keep tax invoices to claim GST credits you have claimed on business related purchases.
Make sure you check what’s GST applicable. Transactions involving food may be GST applicable.
Check your systems as one coding error can classify several transactions incorrectly.
If you find you’ve made a mistake on a previous return, you can:
Do you hold vacant land? Your expenses may no longer be deductible
Are you a property owner sitting on vacant land? The Government has recently released draft legislation to deny deductions for certain expenses associated with holding vacant land.
The current law
The current law allows you to claim the costs of holding vacant land if it is held for the purpose of gaining or producing assessable income or carrying on a business for the purpose of gaining such income.
The proposed law
From 1 July 2019, the proposed law will limit deductions for expenses associated with holding vacant land.
The proposed rules do not apply to expenses associated with holding vacant land that is used by the owner or a related entity to carry on a business. For example, the measure will not apply to a business of primary production or to a property developer that is carrying on a business and is holding land for the purpose of that business.
The proposed rules also do not apply to corporate tax entities, managed investment trusts, public unit trusts and unit trusts.
Why the changes?
This proposed measure was announced in the 2018-19 Federal Budget, and addresses concerns that deductions are being improperly claimed for holding vacant land where the land is not genuinely held for the purpose of earning assessable income.
What is vacant land?
Land is vacant if there is no building or other structure on the land that is substantial and permanent in nature and in use or ready for use.
In this context, land does not have to refer to the whole of the land on a property title but could refer to part of the land on a property title. For example, if a property title includes two areas of land, one containing a factory and the other undeveloped, the part of the property title containing the factory has ceased to be vacant land, while the undeveloped area remains vacant land.
What does ‘substantive’ in nature mean?
To be substantive, a building or structure needs to be:
Deborah owns a block of land. She intends to eventually build a rental property on the land. However, while the block of land is fenced and has a large retaining wall, it currently does not contain any substantial or permanent building or other structure.
As the property does not have a substantial permanent building or structure on it, it is vacant land and Deborah cannot deduct any holding costs she may incur in relation to the land.
What if land does not have a substantive permanent building or structure?
There are many genuine commercial reasons land may not have a substantive permanent building or structure (eg holding yards for goods that are awaiting transport or customs clearance, parking areas for trucks/buses for a logistics company) as not all business operations require structures and buildings.
If the owner of land used for these purposes is a private trust or individual who does not have the requisite connection to the business being carried on (especially where there is a genuine commercial lease to an unrelated third party), all deductions will be denied even though the “vacant land” is an essential part of the business activities.
Tip! Speak to your tax adviser to find out more about how these proposed changes may affect you or your business.
Did you incorrectly claim deductions for travel to your residential rental property?
This tax time, the ATO has identified 26,000 taxpayers who have incorrectly claimed deductions for travel to their residential rental properties, despite recent changes to tax laws.
From 1 July 2017, you are no long able to claim travel expenses relating to inspecting, maintaining or collecting rent for a residential rental property as deductions unless you are carrying on a business of letting rental properties or are an excluded entity.
As with prior years, the travel expenditure cannot be included in the cost base for calculating your capital gain or capital loss when you sell the property.
Note! The new changes only apply to residential rental property. You may still be able to claim deductions in relation to your commercial property.
‘In the business of letting rental properties’
Generally, owning one or several rental properties will not be considered being in the business of letting rental properties.
The receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business of letting rental properties.
This means that as their activities are generally considered a form of investment rather than a business, deductions for travel expenses are not allowed.
An excluded entity is a:
Tara’s Tyres Pty Ltd incurred travel expenses in 2017-18 when the property manager was tasked with inspecting a residential property investment that is currently tenanted. Tara’s Tyres Pty Ltd is a corporate tax entity (a company) and can claim a deduction for rental travel expenses.
ATO and data analytics
The ATO has announced that it will be using sophisticated data analytics to assess a range of other deductions and work-related expenses.
Remember that when making a claim, you must follow the 4 golden rules:
Made a mistake?
Rental property investors: you should check if you fall into one of these exceptions before you lodge and claim for rental travel.
If you have already lodged and made a mistake, you can lodge an amendment. Speak to your tax adviser for more information.
New tax reporting requirements for couriers and cleaners
If you own a business that provides cleaning or courier services (even if it’s only part of the services provided), you now need to lodge a taxable payments annual report (TPAR) each year to tell the ATO about your payments to contractors.
What is a TPAR?
The TPAR tells the ATO about payments that are made to contractors for providing services.
Contractors can include subcontractors, consultants and independent contractors.
The details you need to report about each contractor are generally found on the invoice you should have received from them. This includes:
The ATO will use this information to make sure the contractors you pay are reporting all their income and meeting their tax obligations.
TPAR now extended to couriers and cleaners
New laws were recently passed in Parliament to extend the taxable payments reporting system to include businesses providing:
What are courier services?
Courier services include:
Note! If you sell goods and you provide the option of a delivery service, you are supplying a courier service unless the customer doesn’t have the option to obtain the goods from you any other way.
Courier services don’t include:
What are cleaning services?
Cleaning services include (but are not limited to) any of the following activities undertaken on a building, residence, structure, place, surface, transport/vehicle, industrial machinery or equipment and for events:
Note! If your business provides mixed services, not just courier or cleaning services, you may need to lodge a TPAR if the payments you receive for either courier or cleaning services make up 10% or more of your total GST turnover.
When do you need to lodge a TPAR?
If your business needs to lodge a TPAR, you will need to lodge it by 28 August 2019 for payments made to contractors between 1 July 2018 and 30 June 2019.
Key tax dates
21 Nov 2018
Oct monthly BAS due
28 Nov 2018
Sep quarter SG charge statement due
21 Jan 2019
Dec monthly BAS due
28 Jan 2019
Dec quarter SG due
4 Feb 2019
Feb fuel tax credit rates change
21 Feb 2019
Jan monthly BAS due
28 Feb 2019
TaxWise® News is distributed by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute advice. Readers should consult their tax adviser for advice on specific matters.