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This aim of this blog is to present simplified discussions of matters concerning business development, taxation, legal concepts and technology; with a sprinkling of historical figures and events. Why history? Primarily because its interesting (to me and hopefully you); and secondly, we can learn valuable lessons from past experiences!
If you have a topic you would like included, please email me your request.

What is Division 7A?

Division 7A is part of the Income Tax Assessment Act 1936 and is essentially in place to prevent profits or assets of a company being given tax-free to shareholders or their associates. This can occur where distributions of profit are disguised as loans or other transactions effectively allowing the shareholder or their associate to have access to the corporate tax rate. A consequence of Division 7A applying to certain loans and transactions is that an unfranked dividend is deemed to have been paid to the shareholder or associate in the year the loan is made or the transaction occurs.

When does Division 7A apply?

Division 7A is triggered when a payment or other benefit by a private company is provided to a shareholder or an associate.

A payment or other benefit can include:

  • using business money for private purposes
  • private use of company assets
  • transfer of company assets
  • gifts
  • loans and other forms of credit
  • writing off (forgiving) a debt
  • guarantees

  • Division 7A can also apply when a private company provides a payment or benefit to a shareholder or associate through another entity, or if a trust has allocated income to a private company but has not actually paid it, and the trust has subsequently provided a payment or benefit to the company’s shareholder or their associate.
    Payments or other benefits provided by companies to shareholders or their associates can be treated as an assessable dividend under Division 7A even if the participants treat it as some other form of transaction such as a loan, advance, gift or writing off a debt.
    Division 7A applies to payments, loans and debts forgiven on or after 4 December 1997. However, it may also apply to loans in place before this date, where the amount of the loan is increased or its term extended on or after 4 December 1997. Division 7A applies to debts forgiven on or after 4 December 1997, regardless of when the debt was created.

    When doesn’t Division 7A apply?

    Division 7A does not apply to amounts that are assessable to the shareholder or their associate under other parts of the income tax law, such as normal dividends or director’s fees.
    Payments made to these parties in the normal course of business, such as wages, expenses or repayments of loans, do not constitute a Division 7A loan.
    A payment or benefit that is potentially subject to Division 7A is not treated as a dividend if it is repaid or converted into a Division 7A complying loan by the company’s lodgement day for the income year in which the payment or benefit occurs.

    Who is an “associate”?

    The definition of an “associate” can be quite broad and may include:

  • For an individual shareholder – an associate includes a relative, partner, the spouse or child of that partner of the individual, a trustee of a trust estate under which the individual or an associate benefits, or a company under the control of the individual or associate.
  • For a company shareholder – an associate includes a partner of the company, or a trustee of a trust estate under which the company or associate benefits, another individual or associate who controls the company, or another company that is under the control of the company or the company’s associate.
  • For a trustee shareholder – an associate includes an entity or associate of the entity that benefits or is capable of benefiting under the trust.
  • For a partnership shareholder – an associate includes each partner of the partnership or associate of the partner.
  • Consequences of triggering Division 7A

    When Division 7A is triggered, the recipient shareholder or associate is deemed to have received a dividend equal to the amount of the payment, loan or benefit received. Since a Division 7A deemed dividend cannot generally be franked, if the recipient shareholder or associate is on the top marginal tax rate they would have to pay 45% tax on the dividend.

    Avoiding Division 7A dividends or loans

  • Keep accurate records that explain all transactions, including payments to and receipts from associated trusts and shareholders and their associates.
  • Avoid paying private expenses from a company account.
  • When providing a payment or other benefit to a shareholder or their associate, pay it as a normal dividend (with a franking credit if available) so that the shareholder can include it in their assessable income.
  • If you do lend money to shareholders or their associates, make sure it is on the basis of a written agreement with terms that ensure it is treated as a complying loan so that the loan amount is not treated as a Division 7A dividend.
  • Repay or convert a dividend (with a franking credit if available) by lodgement day.
  • Converting Division 7A dividends to loans

    In the event that repayment of the debt is not possible, a written loan agreement must be put in place so that the loan is not treated as a dividend. If a written loan agreement is put in place, annual repayments of principal and interest are required. A deemed dividend is likely to arise in a later income year if these minimum repayment obligations are not met.

    The written agreement must include:

  • the names of the parties
  • the loan terms (the amount of the loan and the date the loan amount is drawn, the requirement to repay the loan amount, the period of the loan and the interest rate payable)
  • the parties named have agreed to the terms, and
  • the date that the written agreement was made

  • For an unsecured loan, a maximum term of 7 years is allowed or 25 years if 100 per cent of the loan is secured against real property. Under a Division 7A loan agreement, the ATO deemed benchmark interest rate is charged to borrowed funds and treated as taxable income in the name of the company.

    What is it?

    Cloud computing is the delivery of computing services – including servers, storage, databases, networking, software – over the Internet (“the cloud”). Typically, you only pay for cloud services you use, helping you lower your operating costs, run your infrastructure more efficiently and scale as your business needs change.

    Cost

    Cloud computing eliminates the capital expense of buying hardware and software and setting up and running on-site data centres – the racks of servers, the round-the-clock electricity for power and cooling and the IT experts for managing the infrastructure. Server technology is expensive!

    Speed & capacity

    Most cloud computing services are provided as self service and on demand, so even vast amounts of computing resources can be provisioned in minutes, typically with just a few mouse clicks, giving businesses a lot of flexibility and taking the pressure off capacity planning.

    Reliability

    Cloud computing makes data backup, disaster recovery and business continuity easier and less expensive because data can be mirrored at multiple redundant sites on the cloud provider’s network.

    Security

    Many cloud providers offer a broad set of policies, technologies and controls that strengthen your security posture overall, helping to protect your data, apps and infrastructure from potential threats.

    Ease of access to data

    Cloud computing allows you to access your data from virtually anywhere that you have an internet connection. No VPN, no firewall issues ... just attach to the internet and you are ready to run your software and access your data.

    Global data updates

    When you update data on one device, all other devices will see the update the next time they access the data. There is no syncing or file copying. Data is updated across all devices simultaneously.

    Hybrid cloud

    Hybrid cloud is a mixture of both cloud computing and in-premise networking. Some software may not be available yet to run on the cloud, or you may want to keep some data local to your business. In these scenario’s you can mix cloud and local networking to achieve the results you want.

    The ATO has released a resource page that allows tax payers to download information, about what they may be able to claim a deduction for this year, based on their occupation.

      Click here to download the resource sheet.

    This information is relaible and valuable because it's straight from the ATO.

    Described by history as a philosopher-king, Marcus Aurelius was Emperor of Rome.  He was a stoic (dedicated to wisdom, morality, courage and moderation).

    His philosophy is almost paradoxical, when you consider that he was a man of enormous power and wealth, yet a proponent of moderation in all things in the pursuit of a simple life.

    Teachings of Marcus Aurelius:

    Ignore what others are doing - "Do not waste what remains of your life in speculating about your neighbors."

    Reality is shaped by your opinion - “Life is but what you deem it.  If I do not view the thing as an evil, I take no hurt.  Reject your sense of injury, and the injury itself disappears.”

    Do less - “If you would know contentment, let your deeds be few.  Better still limit them strictly to such as are essential.”

    Death is knocking at your door - “If you had died today, and your life’s story was ended, going forward regard what further time you have as a gift; use it well!”

    You’re stronger than you think - “You will get beaten up, break a few bones, bleed, and as a result— you will get stronger.”

    You are working for the good of humanity - “As humans, we live to help one another. No man is his own island.”

    Never complain - “Do the very best that can be said or done with the materials at your disposal, dont waste energy complaining!”

    You can live happily anywhere - “Let it be clear to you that the peace of green fields can always be yours, in this, that or any other spot; and that nothing is any different here from what it would be any other place.”

    Depreciation (also called capital allowance) is what happens when a business asset loses value over time.   A work computer, for example, gradually depreciates from its original purchase price down to $0 as it moves through its productive life.

    To understand how profitable your business is, you need to know all your costs.   Depreciation is one of those costs because assets that wear down eventually need to be replaced.   Depreciation accounting helps you figure out how much value your assets lost during the year.   That number needs to be listed on your P&L report, and subtracted from your revenue when calculating profit.   If you don’t account for depreciation, you’ll underestimate your costs, and think you’re making more money than you really are.

    Because depreciation lowers your profit, it can also lower your tax bill.   If you don’t account for depreciation, you’ll end up paying too much tax.   You can gradually claim the entire value of an asset off your tax.

    While most business expenses are tax-deductible, they’re not all depreciable.   There’s a difference.   Consumables like stationery can be deducted from tax but you have to claim for them in the year you bought them.   For most businesses, only fixed assets can be depreciated.

    A fixed asset is something that will help you generate income over more than a year.   It includes things like tools, machinery, computers, office furniture, vehicles, and buildings.   You don’t always have to own them. Some leased items may be depreciable, too.

    There are many different methods of calculating depreciation, and some of them are quite complex.   Three of the most common are:

    Straight line depreciation

    Under this method, the asset depreciates the same amount every year, till it has zero value.   For instance, an asset expected to last five years would depreciate by one-fifth of its ticket price each year.

    Diminishing value depreciation

    Under diminishing value depreciation, an asset loses a higher percentage of its value in the first few years. That rate of depreciation gradually slows down as time goes on.

    Units of production depreciation

    The lifespan of some assets is better measured by the work they do than by the time they serve.   For example, a vehicle might travel a certain number of kilometres, or a packaging machine might box a certain number of products.   You could depreciate these assets based on usage rather than age.

    It's a cliche, but its critically important.  Working ON your business is vital, for its longevity and prosperity.  

    You do less!  This is where I hear, “but I'll go broke if I do less!”.   Maybe its better to go broke and find a purpose in life again, than slowly killing yourself in a role thats just not working for you.   Or maybe by doing less, (working in the business), you will have the time to start working ON the business; allowing someone else the opportunity to work in the business, instead of you.

    By removing yourself from the everyday tasks of your business, you may be able to actually grow and up scale your business, including focusing on ways to increase revenue and profitability.   Focus on building those systems that will allow you to DELIGATE and SYSTEMISE.  Delegating allows you to free up your own time and leverage the multiplying effect of many more people.  Systemising allows you to provide efficient and productive routines to those people you have delegated to.

    Finally, learn to lead.  Yes learn, because leaders are not born, they are trained to lead.   Seek out leaders you admire and examine carefully how they operate.   Then try to emulate their methods and mannerisms. Most importantly, don’t be too hard on yourself if you fail along the way.   The difference between a master and an apprentice, is that the master has made more mistakes, for longer.   Give yourself time to learn and enjoy the journey.

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    Rodney J Warner
    Ph: 0417 910 328
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    Drago Graovac
    Ph: 0403 293 461
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    Sky Public Accountants

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