Did you repay a director’s loan before June 30 and then redraw the loan after June 30?
Repayments made to Div 7A loans, that are redrawn as a new loan, are not considered payments and cause your Div7A loan to be non-compliant with massive tax ramifications.
Under section 109(2) of the Income Tax Assessment Act, the ATO disregards any repayment that is redrawn, making your Div7A loan non-compliant.
If not treated, the full balance of the loan is taken as an unfranked dividend and fully assessable to the borrower in the year draw at tax rate of up to 47%. In addition, the company cannot access a franking credit on this deemed dividend, with a loss of tax credits of an additional 25%.
If you have redrawn a division 7A loan, the A2B team will review you file; and if possible, treat the loan as a wage or franked dividend. This will save 25% tax but cannot avoid the tax at your marginal rate on the entire balance.
The ATO has highlighted this issue to Tax Agents in recent seminars and advised us of increased audit activity. Please find below a link to an ATO publication discussing this issue.
At Accountanst 2 Business we are opposed to the ATO view in this instance. However, we must comply with the law.
