Is your business money really your money? What Macedon Ranges business owners need to know about Division 7A

Here's a scenario that plays out more often than you'd think: a private company shareholder uses the business credit card to pay for a family holiday. Or school fees. Or a home renovation. It feels harmless — it's your company, after all — but the ATO has a specific rule designed to deal with exactly this situation, and it's called Division 7A.

If you run a private company in the Macedon Ranges, this is worth understanding.

So what is Division 7A?

Division 7A is an anti-avoidance rule that stops private company profits or assets from being handed to shareholders (or their associates) tax free. The ATO regularly flags it as one of the top areas where small business errors occur — and most of the time, those errors aren't intentional. They come down to a fundamental misunderstanding.

Here it is: your company is a separate legal entity. Its money and assets belong to the company — not to you personally. Even if you own the company, dipping into company funds for personal use doesn't make those funds yours. And if you do use company money for private purposes without resolving it properly, Division 7A can kick in and treat that amount as an unfranked dividend, taxed in your personal return at your marginal rate.

That can be a nasty surprise come tax time.

How to avoid a Division 7A headache

The simplest fix is to keep business and personal finances completely separate. Dedicated bank accounts and credit cards for business expenses make it much easier to draw a clean line between what's the company's and what's yours.

But if company money has already been used for personal purposes, you've generally got two options:

Pay it back in full within the relevant timeframe, or set it up as a complying loan agreement.

A complying loan agreement doesn't need to follow a set format, but it does need to be in writing and include all of the following:

• The identity of both the borrower and the lender

• The loan amount

• A requirement to repay the loan

• An interest rate no lower than the Division 7A benchmark rate

• The loan term (usually up to seven years, or longer if secured by a registered mortgage over real property)

Critically, the agreement needs to be signed and dated before the company's lodgement day for the income year in which the loan was made. Miss that deadline and you lose the option.

Not sure where you stand?

Division 7A catches out plenty of well-meaning business owners across Gisborne, Kyneton, Woodend and the wider Macedon Ranges — not because they're doing the wrong thing, but because the rules aren't always obvious.

If you've got questions about Division 7A, or you want to make sure your current setup is compliant, come and have a chat with our team. We'll make sure you're across your obligations and help you put the right structures in place before the ATO comes knocking.

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