Division 7A of the Income Tax Assessment Act 1936 (ITAA36) is a self-executive set of integrity measures designed to combat the collection of profits from private companies in a tax-free form. Such profits have generally borne only 30 cents in dollars of corporate tax – far less than the high personal tax rate of 46.5 cents to which the company`s shareholders may be subject. A common way to extract the remaining 70 cents in dollars without obtaining additional taxes is for the company to grant a credit to shareholders or associated companies.1 A private business loan can also be refinanced if the loan is subordinated to another loan from another company. Subordination must result from circumstances outside the control of the company to which the original loan was granted. The private company and the other entity must have acted on the length of the arms with respect to subordination. As a result, the $700,000 credit capital will be repaid to the Company by July 1, 2018, plus $160,494 in accrued interest. The annual refund is made through an application. a fully frank dividend declared by the company (6 x 133.532 USD and 1 x 59.302 USD). The $160,494 in interest income generated by the company, less 30% of corporate tax, will increase the pool of retained profits. This will provide sufficient after-tax profits to explain the necessary dividends of $860,494 over the term of the loan for compensation with repayments of the same amount. This is reconciled as follows: It is a chance that Div 7A will allow time to decide what to do with a loan granted this year before the deadline for submitting bids for a given year. This gives your client the opportunity to do this type of analysis and allows time to study bank credit options or other ways to finance costs.
In the end, the choice between alternatives is your client`s choice, but one that is made with comfort when the results of each alternative are quantified and therefore comparable. Summary: When a private company grants a loan to a shareholder or associated company in a year of income, Div 7A of the Income Tax Assessment Act 1936 (Cth) may exclude the payment of a dividend by the company.