Division 7a Loans – How to manage them!

A quick google search will tell you that Taxation has existed since 3,000 BC. Thank you, Ancient Egypt! Taxation has always been an integral part of human civilisation.

Within our lifetime new taxation legislation has been introduced for three main reasons

1. To keep up with changes in society. For example, new income or assets - think Crypto.

2. To make things fairer and more equitable. By creating rules to tax different entities/structures to plug holes in the system.

3. To stabilise the economy. Economics 101 - to grow an economy cut taxes, to slow an economy raise taxes.

So, what does any of that have to do with taking drawings, being cash or goods, from a company?

We can access the 25% company tax rate - unless you take personal money out of the company (drawings!)

The corporate tax rate is currently 25%. Anyone earning a liveable wage will have a marginal rate of 30-37% or higher. (2025 financial year)

The tax advantage, between 5-30%, as a result of not paying wages or dividends out to individuals needed to be dealt with in partnership with us.

The Division 7a legislation forces the Directors drawings to be treated on commercial terms.

Each year the total drawings between 01 July and 30 June creates a new Company asset. (Division 7a Directors Loan)

The legislation requires this loan to be repaid within 7 years.

The loan will accrue interest during this time at a rate set by the ATO. Historically, the interest rate on Directors loans is double what you would be able to get from a bank.

ATO Division 7a interest rate is currently 8.77%.

We are working closely with our clients to manage and plan for division 7a minimum repayments.

As we prepare your year-end accounts we will talk you through your Division 7a loans, options to minimise any additional loans moving forward and help you plan for any minimum required repayments over the 7 year term.

Alicia Delves 08.01.2025