NTAA Division 7A Offset Agreement: What You Need to Know
If you’re a small business owner in Australia, you may have heard of a Division 7A offset agreement. This agreement is an important tax planning tool for those who have loans from their private companies. Here’s what you need to know about NTAA Division 7A offset agreement.
What is Division 7A?
Division 7A is a section of the Australian Taxation Office (ATO) laws that regulates payments made by private companies to their shareholders and associates. This includes loans, payments, and benefits that a company provides to its directors, shareholders, and their family members.
Typically, these payments are considered as taxable income and are subject to tax. However, if a company provides loans to its shareholders and associates, these loans can be considered as a dividend and taxed accordingly.
What is an offset agreement?
An offset agreement is a legal document that outlines the details of a loan between a private company and one of its shareholders or associates. The agreement allows the shareholder or associate to offset the loan amount against any dividends that they receive from the company.
This means that if a company has a Division 7A loan with a shareholder or associate, they can reduce their tax liability by offsetting the loan amount against any dividends they receive from the company.
What are the benefits of an offset agreement?
An offset agreement can offer several benefits to small business owners, including:
1. Reduced tax burden: As mentioned, Division 7A loans are subject to tax. An offset agreement can help reduce the tax burden by allowing the shareholder or associate to offset the loan amount against their dividends.
2. Cash flow management: An offset agreement can help manage cash flow by allowing the shareholder or associate to repay the loan over time, rather than in a lump sum.
3. Improved relations with shareholders and associates: An offset agreement can improve relations with shareholders and associates by offering a flexible repayment schedule and reducing the tax burden.
How to set up an offset agreement?
To set up an offset agreement, you need to follow these steps:
1. Determine whether you need an offset agreement: An offset agreement is only required if you have a Division 7A loan with a shareholder or associate.
2. Seek professional advice: It is important to seek professional advice from a qualified accountant or tax advisor before setting up an offset agreement.
3. Draft the agreement: The offset agreement should include the loan details, repayment schedule, and the offset amount.
4. Sign the agreement: Both the company and the shareholder or associate must sign the offset agreement.
In conclusion, an NTAA Division 7A offset agreement allows small business owners to manage their tax liability by offsetting their Division 7A loan amount against any dividends they receive from the company. It’s important to seek professional advice and draft a legal agreement before setting up an offset agreement.