Division 7A of the Income Tax Assessment Act

Background

A Division 7A dividend is an amount deemed by the Australian Tax Office (ATO) to be assessable income of a shareholder of a private company that attempts to make a tax-free distribution of profits to the shareholder, or the shareholder’s associate.

Division 7A may apply to loans, payments and debts forgiven on or after 4th December 1997. It applies to debts forgiven on or after on or after 4th December 1997, regardless of when the debt was created.

An associate of an individual shareholder includes a relative, partner, the spouse or child of the individual, a trustee of a trust estate under which the individual or associate benefits, or a company under the control of the individual or associate.

Division 7A also defines associates of a company shareholder, trustee shareholder and partnership shareholder.

Advice to Clients

If a client seeks advice on making a payment to a shareholder, not expecting the amount to be repaid, and without formally declaring a dividend, there are three scenarios that could be considered:

Question whether or not they should take this course of action.

If they wish to proceed, point out that the ATO may treat the payment as a dividend in the hands of the shareholder and income tax could be applied.A written commercial loan agreement may be used, subject to the minimum interest rate, maximum term and minimum repayments criteria set by the ATO. Such agreements may be excluded from consideration under Division 7A.

In this complex area, obtaining a professional expert’s opinion could be money well spent.

Please refer to the below link for more information provided by the Australian Taxation Office.

http://www.ato.gov.au/businesses/pathway.aspx?pc=001/003/075