Learn how to properly offset Division 7A minimum yearly repayments against franked dividends. And why journal entries - particularly backdated ones - are not sufficient to prove that the repayment was satisfied by 30 June.

You may want to watch this video first - Division 7A - 6 Strategies to Deal with Minimum Repayments but it's not a prerequisite.

Next episode - Episode 2 - Triangle offsets - when you have a different shareholder and borrower.

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Resources

Tax Talks spoke to Robyn Jacobson - Senior Advocate at The Tax Institute regarding this topic. Check it out here - Episode 260 - Division 7A dividends.

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TRANSCRIPTS

Introduction

So let's go back to our original example, which is where you borrowed 500,000 from your private company. And you put it into a division 7A complying loan agreement. And so minimum yearly repayment is due on 30 June, which is circa $85,000. And you decide to pay that minimum repayment via offsetting it against a franked dividend paid by your company to yourself on 30 June, 2021.

So basically instead of the company physically pay you cash of $85 K in respect of that dividend, the payment of the dividend is offset against the minimum yearly repayment that you owe to the company.

0:40 - Backdated journal entries

So a lot of people think that merely processing a journal entry is sufficient to prove that the offset has occurred. And the minimum repayment has been satisfied by 30 June. They only do this when the accounts are being prepared, right, which is after year end. And they also only prepare the dividend statement post year end. Because you know, private companies can issue a dividend statements or distribution statements within four months of year end.

But this is actually not sufficient. You see a journal entry is merely recording something that has happened. But has the offset actually occurred by 30 June, 2021? Like, do you have anything else to prove that, apart from the journal entry, which is kind of like backdated to 30 June, 2021. A director's resolution that the dividend has been declared is not sufficient.

And, you know, journal entries should not be taken as evidence that the offset has actually occurred. There needs to be something more to prove that it has actually occurred.

Look, I know I sound like a pain in the ass, but if you don't believe me, ask tax royalty Robyn Jacobson about this. So check out episode 260 of tax talks, where she discusses this in detail and it's free. So go to taxtalks.com.au.

So here is what you really need to do.

02:11 - By 30 June 2021

Before 30 June, 2021.

So, first of all, you have to calculate the minimum repayment that is due on 30 June, 2021.

So the directors need to sign a director's resolution to declare dividend by 30 June, 2021. And that the company is planning to pay this dividend via set off against the minimum repayment by 30 June, 2021. But this is merely recording the director's planning, right. It is not that the offset has actually occurred.

So I recommend that a deed of offset be entered into between the company and yourself, the individual shareholder slash borrower, which essentially agrees that the dividend will be offset against the minimum yearly repayment. And the deed needs to be signed by the individual shareholder and the director of the company, and they dated by 30 June 2021.

And then post the June, that's where the company can issue a dividend statements slash distribution statement, to ensure that the dividend is franked. And, you know, that can be done within four months of year end. So if we're FY 21, the distribution statement needs to be issued to the shareholder by 31 October 2021.

And then the company can take its time to process the journal entries to eliminate the repayment against the dividend.

3:33 - What if you get it wrong?

So your next question might be like, this is so over the top! Does the ATO even care?

Here's what I can tell you. My recommendation above is like a technically correct, less risky way of offsetting franked dividends against minimum repayments. If you don't follow this, it's not really the end of the world, right. For instance, it's not a hundred percent clear cut that you're going to have a deem dividend straight away.

But if you're being reviewed or audited by the tax office, if you haven't done this and you're merely relying on journal entries to prove that the dividend was declared and the minimum repayment was set off definitely by 30 June, you're potentially opening up some weaknesses that the ATO can scrutinize.

So for instance, if you have a bad relationship with the ATO, or you're dealing with them on another contentious issue or you have multiple issues with them, they can easily add this one to the list and use it against you. And technically, if they don't like you, they can take this position that a deemed dividend has arisen because the journal entry is not sufficient to prove that the offset has actually occurred before 30 June.

And you really don't want to be in that position, right? And you really also don't want to be the clients tax agent or tax advisor, who's in that position as well. The client will be like, but Hey Mitch, you told me that it was okay.

So in the next episode, I will go through a more complex situation where the shareholder is a trust, but another entity has actually borrowed the Div 7A loan. I'll see you in the next video.

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