A common one we do is pay the minimum repayments on the unsecured loan. Unsecured Division 7A loan is a 7-year term. There are minimum repayments and we can pay these in cash (transfer back). The alternative is to issue dividends to the shareholders, or pay salaries to the people running the business on paper, instead of paying them cash because it reduces the loan outstanding. Basically, if there is a $10,000 minimum repayment needed. We can issue a $10,000 salary, instead of transferring cash from the company to the personal account. You can reduce that off the loan that the person owes back to the company.
If you are taking more cash out each year, you can start a new loan in that financial year that you take more cash out of the company because it resets your 7 year repayment term. Some balance sheets may have –
Loan – (your name) 2020
Loan – (your name) 2021
Each loan may have its own financial year attached if you are drawing down more each year.
Sometimes this strategy is used when people are retiring and they are coming up to a business exit. So, we intentionally tax them less in their own names, build up a bit of a Division 7A loan in their company and once they are no longer earning income in the company, we pay down dividends back to the individuals to reduce the loan outstanding. Another way is to leave the money in the company and issue dividends each year to extract the money, once the business has sold or they’ve become retired.
Watch the full webinar, ‘Solving Company Loads Division/7A Problems ’ at https://learning.benwalker.com/courses/solvingcompanyloansD7AP
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