Practitioners Warn Against 7A Division Journal Listing Practices
Speaking to Accountants Daily, Robyn Jacobson, senior tax trainer at TaxBanter, said the use of journal entries to make Division 7A loan repayments via a dividend has brought to light a number of practices that may not fully comply with the law.
When it comes to making annual minimum annual repayments for Division 7A loans, SMEs often look to dividends to make repayments, typically paid using a journal entry rather than ‘a cash payment.
âIt is obvious that some practitioners may not fully understand the different rules governing the payment of a dividend per newspaper,â Ms. Jacobson said.
According to Ms Jacobson, the use of a journal entry to pay a dividend is subject to a number of rules across the Corporations Act, tax law and Tax Agent Services Act 2009.
This includes how the dividend is to be duly declared by June 30 by the directors of the company, in accordance with the incorporation of the company to an eligible shareholder.
The decision to declare a dividend must also be the subject of a minutes or a resolution which must be filed in the register of companies within one month of the meeting.
In addition, the company must deliver a distribution declaration to the shareholder within four months of the end of the year.
Ms Jacobson noted that although the journal entry to record the payment of the dividend may be dated at the time of publication, it is fraudulent to backdate the documentation of the dividend, potentially leaving practitioners exposed to a violation of the article. 30-10 of the Tax Agents Services Act 2009.
Finally, Ms Jacobson said that a journal entry only amounts to a payment when the principle of mutual compensation applies, for example, when the company’s obligation to the shareholder is enforced against its obligation to make the minimum annual repayment.
“When there is no obligation of the company towards the shareholder, that is to say because no dividend has been declared on June 30 creating the indebtedness of the company towards the shareholder, journaling is inefficient from a Division 7A perspective, âMs. Jacobson said.
“This will result in a shortfall and a deemed unpaid dividend.”
Ms. Jacobson believes that while there has been a surge of interest over the past 10 years in having trustee resolutions passed by June 30, declarations of dividends should also be considered.
âAccountants sometimes suggest that the dividend amount is unknown as of June 30, so the documentation cannot be prepared on the required dates. But in the event that the dividend is used to make a minimum annual repayment on a loan made in a previous income year, the minimum annual repayment amount will be known well in advance, there is no therefore has no excuse, âshe said. noted.
“It would be a relatively straightforward exercise for the ATO to check if this is done correctly.”
Ms Jacobson’s comments come after former ATO technical director Vincent Licciardi said there was a “widespread misconception” in the accounting industry about what journal entries are and how they are. used.
âI think a lot of accountants just think that accounting entries and journaling are just the cure for all problems, and all of that just puts their client in conflict,â Licciardi said earlier.
“Remember that the journal entry is just a record of the transaction that has already taken place, it is not the transaction itself – this is the key issue.”
Jotham Lian is the Editor-in-Chief of Accountants Daily, the leading source of news, analysis and information for Australian accountants.
Prior to joining the team in 2017, Jotham wrote for a range of national titles including the Sydney Morning Herald and Channel NewsAsia.