Rigby Cooke Lawyers tax counsel Tamara Cardan said non-compliant Division 7A loans were quite a common mistake for family businesses to make, given the propensity for some family members to treat the family business like their own bank account.
The issue may have been exacerbated during the COVID-19 crisis, with appropriate loan agreements falling by the wayside in a bid to help with family members’ cash flow, potentially causing these payments to be counted as dividends and ultimately taxable.
“I have seen many situations where you have money going back and forth in a business with no loan agreements,” Ms Cardan said.
“It’s often the case family businesses that make interest-free loans to shareholders, usually members of their family, are not doing this to wilfully avoid tax. But a lack of intent is not a sufficient reason for leniency.
“There hasn’t been any indication that the ATO will be pursuing more lax enforcement to help businesses or individuals navigate the COVID-19 crisis.”
Ms Cardan’s warning comes after the ATO announced a last-minute extension to minimum yearly repayments for borrowers, giving them until June 2021 to make their 2019–20 repayments.
She noted, however, that the ATO’s repayments extension would not offer any leniency towards non-compliant loan agreements.
“While borrowers will welcome the relief, those borrowers who have failed to put the appropriate agreements in place will not sleep any easier,” Ms Cardan said.
“It’s essential that they have the right paperwork in place; otherwise, that generosity could see their family member end up with an unwanted tax bill.
“Like much of the ATO’s leniency during the pandemic, this extension defers the issue rather than alleviate the financial burden of a tax debt.”
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Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.
Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.