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In the fiscal landscape, changes are the only constant. Recently, there's been a significant uptick in repayments for Division 7A loans. Effective from July 1, 2023, the interest rate benchmark for these loans has taken a leap from the previous 4.77% to a hefty 8.27%. This surge is not without its consequences, particularly for those entangled with existing bank covenants.
Division 7A loans primarily function as a mechanism to redistribute wealth within a specific group. However, the heightened interest rate can have a substantial impact on debt servicing covenants. For instance, a business might be thriving with a consistent influx of assessable income. Still, from the bank's perspective, these payments are obligations requiring servicing, potentially creating obstacles in securing future loans.
The traditional method of repaying a Division 7A loan involves regular repayments of both the principal and the interest over an agreed term. Many taxpayers steer clear of making minimum annual repayments on Division 7A loans from their wages, meaning they require a larger trust distribution or dividend from the company to meet the repayment.
With the financial year 2024 looming, taxpayers might want to contemplate early repayment of Division 7A loans to mitigate exposure to high interest costs. This objective can be attained through several strategies:
These strategies can provide more flexibility in managing cash flows and tax liabilities, but they also require careful planning and execution to ensure compliance with tax laws. As always, we encourage you to reach out to us and discuss your tax planning and – if you currently have Division 7A loans - how the rise in interest rates may impact you.
The Government has reinvigorated the 120% skills training and technology costs deduction for small and medium business. An election ago, the 2022-23 Budget proposed a 120% tax deduction for expenditure by small and medium businesses on technology, or skills and training for their staff. This proposal has now been adopted by the current Government and details released in recent exposure draft by Treasury.
From 1 July 2022, the standard Superannuation Guarantee (SG) rate increased from 10% up to 10.5%. It’s part of the government’s commitment to increase the SG by half a percent each year until 2025, when the SG rate will reach 12%.
The Australian Federal Budget 2022 was delivered on 29 March 2022 by the Federal Treasurer Josh Frydenberg. See our breakdown of the tax measures impacting small business in Australia.
Smith Shearer, in collaboration with Kitto and Kitto Lawyers, will be hosting the ECCI Business After Hours on 12 August 2021
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