Division 7A (Only for Business) Concept

What is the purpose of Division 7A?

Division 7A is part of the Income Tax Assessment Act 1936 and is intended to prevent profits or assets from being provided to shareholders or their associates tax-free. A Division 7A deemed dividend is generally unfranked.

When is Division 7A Applicable?

1. The loan is given by the company to Director 

2. The loan is given by the company to trust

Division 7A Applicable, only if Loan to Directors or Loan to Trust Opening Balance shows Debit Balance

If Division 7A is Applicable then we need to calculate interest and Minimum Value repayment. 

To Calculate interest and Minimum value repayment go to the ATO website? Division 7A calculator and decision Tools

Questions | Division 7A calculator and decision tool

1. Decision Tools 

Determine whether a loan from a private company to a shareholder or shareholder's associate will be deemed a dividend

2. Calculator

Calculate a minimum yearly repayment and the amount of the loan not repaid by the end of an income year. 

3. Income year of Loan

In which year company give a Loan to Director or Trust select that financial year 

For Example: In Ledger Loan to Director FY-2019 Select from Drop Down (2018-2019)

4. Is the loan secured or unsecured?

Unsecured Loan

(An unsecured Division 7A loan, with a maximum term of 7 years)

5. Full Term of the amalgamated loan in a year?

7 years

6. Income year that you wish to calculate the minimum yearly repayment 

For which year you are going to prepare a Company Tax Return select that FY Year for Ex: FY  2021-2022

7. Amount of the amalgamated loan not repaid by the end of the 2020-21 income year

Enter the Amount of Loan not repaid at the end of the 2020 -21 Financial Year (It means last year's closing balance will become as current year's opening balance) Type the Amount Loan to Director FY-2019 (Debit Balance) Ledger Opening balance 

8. Would you like to calculate the principal and interest component of repayments, and the amount of the amalgamated loan not repaid by the end of the 2021-22 income year?

Yes 🡺Show Result

In Result showing Interest for Ex $ 1806.99

Journal Entry 

Asset 🡺 Loan to Director FY 2019 Dr $ 1806.99

Income 🡺 To Interest Income Division 7A @ 1806.99

For Example, The minimum Yearly repayment made for $ 9112

• Check the bank account is there is any amount received from the director if yes adjusted with a loan to the director -2019 Follow FIFO

• Or Else 

• If any Credit Entry made to adjust loan to director -2019 

• For Example Wage payable by the company to the director is then adjusted with a loan to the director any balance calculates the Dividend

So, in the above Two Cases, any repayment made For Instance $ 8000 repayment made of wages to the director $ 8000 made as credit for CY

So the Minimum Repayment of         $ 9112

Repaid                 $ 8000 

Balance                             $1112

Expenses as per Book Keeping 🡺 

Dividend or Director Fees Dr. $ 1112 

To Loan to Director $ 1112

But at the time of calculating Taxable Profit, This Expenditure will be disallowed for taxable Profit Calculation

9. Add repayments made during the 2021-22 income year (Current Year)

If there is any Repayment need to ADD Add + 

Add Repayment made During the year Current Year) 2021 -22 income year loan repayment details 

1. Date of Loan Repayment 

2. Amount of Repayment 🡺 Save 🡺 Now Click Show Result 

Ledger Account was Kept separate for Every Year

1. Loan to Director FY 2019

2. Loan to Director FY 2020

Unfranked Dividend, Franked Dividend, Franking Credit Concept

Example:1 At the time of Issuing Dividend by Company 

Company Tax Rate = 26%

Maximum Company Can Issue Franked Dividend

(1300/26%) X100= $5000 (Gross)

If Company Issued more than $ 5000 Dollars as a Dividend then the Balance Amount is Called Unfranked Dividend

For Example: In the Above case if the Company issue $ 7000 as a Dividend, then 

  If the company Paid Less than $ 5000 as a Dividend then the balance will show as input credit

1. Example: 2 Franking Credit

Per Share companies profit $2.1428

Corporate tax on Profit 30% $0.6428

Per Share Net profit after Tax $1.50

Which is Tax for the company The same is Franking Credit for shareholders 

The Profit will give to shareholder as a Dividend along with Franking Credit 

Example 2a

Individual level ITR @ 19%

The individual received net Dividend from company 1.50 

Franking Credit 0.6428

Taxable Income             2.1428

(DPS + FC)

Tax rate 19% 0.4071

Franking Credit (0.6428)

Tax Refund 0.2357

Example 2b

 Individual level ITR @ 45%

The individual received net Dividend from company 1.50 

Franking Credit 0.6428

Taxable Income             2.1428

(DPS + FC)

Tax rate 45% 0.96426

Franking Credit (0.6428)

Tax Refund 0.32146