Why Division 7A Was Brought In

If you were a sole trader and you made $1M, here are some options:

Option 1:

Taxed in your own name at 47% top tax rate. 47% is the highest marginal tax rate of an individual and it’s higher if they have a hex debt of another 8-10%. So, you are above half of your profit going to the taxman and more again if you don’t have private health insurance. For argument’s sake, let’s say 47% tax is option 1 which means on a $1M, you’re left with $530,000 in after tax profit.

Option 2. 

If you earn a $1M profit in a company, and you meet the requirements for the reduced company tax rate of 26%, which is a flat rate of tax and it is not marginal, you’re left with net after tax profit of $740,000.

Whether a million bucks was earned in a single year, or over a couple of years, the point is, In a company, you end up with a lot more after tax money. The whole idea of Division 7A is for most people to get that out and spend it.

Here’s an example:

Clive Palmer wants to buy a bigger boat. He can buy a bigger one if he funnels the million dollars in profit through a company versus his own name. He’s got more net cash if he structures as a company versus taking it out in his own name.

What he would do in this case is, he buys a boat in a company name. It is still a Division 7A issue if the asset that he buys is a personal asset like a boat, for instance. If it’s nothing to do with his business, then he has Division 7A consequences on his boat even if it’s in the company name.

The second option is where he takes the cash out of the company into his own name and buys a house. 

He buys another Gold Coast mansion, so instead of paying tax on the profit in his own name, the company pays less tax, and it loans him the net profit. He still puts it through the company, but instead of paying it out as a salary or a dividend, he loans it out, so he doesn’t pay that extra tax. Basically, it’s a way of taxing that money that’s loaned out, or personal assets that are bought in the company’s name.

Watch the full webinar, ‘Solving Company Loads Division/7A Problems ’ at https://learning.benwalker.com/courses/solvingcompanyloansD7AP

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