How To Avoid A Division 7A Loan Disaster

On a recent webinar, Rizal Ramzan, Partner of Inspire, talked about how to avoid a Division 7A loan disaster. Here’s what he said:

“There are situations where people want to keep their taxable income low and save taxes to maintain a lower income.

So, what they do is they pull a small amount of salary or a small dividend in their personal name. However, their living expenses exceed what they have actually withdrawn.

That is where the problem arises. They still have to pay for their home loan, so they pull money out of the business. That additional top-up, that difference, can become a Division 7A loan if not treated properly, or if there isn’t a plan for it.

So, the fundamental issue is you need to work backward first. Determine what you need in terms of your living expenses and lifestyle. Whatever that amount is, that’s the amount you want to take out personally.

The reason we emphasize this is that you won’t be able to pay it back. It’s not an investment; it’s an amount you cannot return. Another analogy to consider is that if you don’t take it out personally and get taxed on it, borrowing for it is like living on a credit card, in a sense.”