Many shareholders, directors or associates from time to time receive a payment or other benefit from a private company. This payment may not be a transaction completed in the normal course of business – for example, it may not be a payment of an expense or repayment of a loan. However in many cases these payments and benefits are treated as a loans, advances, debt forgiveness or gifts. Be warned- under Division 7A these payments can be treated as an unfranked dividend for income tax purposes. This means the whole amount of the dividend may be taxed in the hands of the shareholder.
Division 7A is part of the Income Tax Assessment Act 1936. Its aim is to basically prevent profits or assets being provided to shareholders or their associates tax free. The definition of an “associate” can be quite broad and may include relatives, partners or companies of the shareholder and both discretionary and unit trusts just to name a few.
In order to avoid potential Division 7A deemed dividend consequences, any payment or benefit needs to be repaid or converted in to a Division 7A complying loan by the lodgement day for the income tax year in which the payment or benefit occurs.
There are a few things tax payers can do to ensure they don’t fall foul of Division 7A provisions. This includes ensuring accurate record keeping of loans and distinguishing of personal and company expenses.
If you believe you have a potential Division 7A issue or are unsure if it applies to your situation, please contact our team for expert advice and guidance. We can ensure you have complying written loan agreements in place so that loans aren’t treated as dividends.