What Division 7A does
If a private company lends money to a shareholder or their associate and it is not repaid or put on a complying loan agreement by the lodgement date, the ATO can treat it as an unfranked dividend. Tax is payable at the shareholder's marginal rate, with no franking credit.
How it happens
Rarely on purpose. A director pays a personal expense from the business account, or transfers funds to cover a mortgage payment, intending to sort it out later. Later arrives at year end, and the amount has grown.
The fix
A complying loan agreement with minimum yearly repayments, or repayment before lodgement, or a properly declared and franked dividend. Each has a different cost. The wrong one is doing nothing.
The problem is almost never the transaction. It is the missing piece of paper that should have gone with it.
This article is general information only and is not legal advice. Contact YSA Partners for advice on your circumstances.