Directors Loans & Sole Shareholder Companies

We have seen a rise in the number of Business Coaches advising Clients not to utilise Directors Loans (Division 7A).

This is due in part to the ATO’s increase to the interest rates associated – but more likely as this ‘advice’ has found its way onto checklists being used by advisors who do not specialize in taxation law. As a result this advice is being doled out without due understanding of this legislation and the tax impact for clients.

The purpose of the Division 7A rules is to compensate Shareholders where Directors or other Shareholders have borrowed money from a Company and they have not enjoyed the same benefit.

One of the ways this is dealt with is by having a minimum rate of interest charged on loans to Directors or Shareholders to make sure that no one is disadvantaged.

Where you, or perhaps your family trust, is the sole Shareholder of a Company – the Division 7A rules mean that you are paying interest to yourself.

For this reason, the ability to legally spread income out over a period of 7 years in accordance with the Division 7A rules may still be highly effective from a tax perspective.

The goal of tax advisors is to help you legally pay the least amount of tax possible each year.

If you receive this advice, the best follow up questions are:

• Why is this your advice?

• Does your advice change given that the Company only has a single Shareholder?

And then, of course, I would check with your tax advisor who is aware of your particular circumstances and tax strategy.