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 However, their living expenses exceed what they have actually withdrawn.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.”

If you’re keen to explore changing accountants, we have a non-obligation process to do that. The first step is booking a strategy call with one of our accounting team. It’s a free 20-minute zoom or phone call where you get to meet us to manage your questions. 

From that point, you can consider doing a “Look Under The Hood” with us. There is no obligation to change accountants, but we give you a second opinion if you’re paying too much tax. 

Throughout that process, we can identify any problems we see with your current setup. Anything that your current accountant hasn’t claimed, or tax you may have overpaid, and strategies of how we might fix that going forward. We can run through with you once you book with us. 

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