You’ve been drawing money from the company for years. Your accountant logs it as a Division 7A loan. It sits on the balance sheet and you don’t think much about it.
But if your business is now in trouble, that loan could be the problem you didn’t see coming.
What Is a Division 7A Loan?
A Division 7A loan is money you have drawn out of your company, or expenses the company has paid on your behalf, that has been recorded as a loan rather than a salary or dividend.
Most private company directors have one. They are very common.
The ATO does not allow you to access company profits indefinitely through a loan. If the loan is not set up under a formal written agreement with minimum interest rates and a repayment schedule, the tax law treats the money as income you should have paid tax on.
Why Does It Become a Problem When the Business Struggles?
While the business is trading normally, the loan sits there. Your accountant manages it year to year.
The problem comes when the company can no longer pay its debts.
If your business reaches a point where it needs to wind up, and your loan account has not been repaid, the forgiveness of that debt triggers what the ATO calls a deemed dividend. That means you personally owe income tax on the full amount of the loan, even though the business is gone.
You might be dealing with company debts and discover there is also a separate personal tax liability on top. Two separate problems. Both serious.
What Are My Options?
The answer depends on where you are in the process.
If the company has not yet entered liquidation, there may be options to manage the loan account before that happens. Debts across related entities can sometimes be settled in a way that changes the overall picture. The timing of decisions can matter significantly.
This is where getting advice early makes the most difference. Options that exist before liquidation may not exist after it.
If the company does need to wind up and the personal tax liability is unavoidable, the focus shifts to your personal position. A Part X Personal Insolvency Agreement is one pathway that allows you to deal with personal creditors, including the ATO, without going bankrupt. You can read more about what this involves on our personal insolvency page.
What If I Am Already Under Pressure?
A lot of business owners hold off on getting advice because they are not sure what they will hear.
But the earlier you understand your position, the more choices you have about what to do next.
Timing matters. The window between identifying the problem and a formal insolvency appointment is when the most useful work can happen.
de Jonge Read® works with directors and business owners in exactly this situation. The team reviews your full position, including any Division 7A exposure, and maps out what your options actually are.
A confidential, obligation-free conversation costs nothing. Getting clarity now, while options still exist, is always easier than managing a crisis once one has started. Call 1300 765 080 or visit our contact page to speak with the team.
Did you know?
Phoenixing is another name of business restructure. Read more about business restructures and when this can be an option for you.
