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  • Writer's pictureGary Threlfall

Shareholder Loans – Deemed Dividends Rules

Here are some often forgotten dividend rules. A technical but a read well worth your time... Division 7A of the ITAA 1936 applies o prevent profits or assets being provided to private company shareholders (or their associates) tax free (e.g., by way of a loan). Broadly, where a transaction triggers Division 7A, the underlying payment or benefit provided by a private company may be treated as an assessable deemed dividend (which is usually unfranked) in the hands of the recipient.

Importantly, not all payments, loans and forgiveness of debts necessary trigger Division 7A, and various exclusions exist. The following (non-exhaustive) list provides some of the more common transactions which will not be treated as deemed dividends under Division 7A:

  • Loans or payments made to a shareholder/associate that are already included in the Shareholders/associates assessable income under another provision of the tax law (or are specifically excluded from their assessable income under another provision of the tax law).

  • Loans or payments made to, or debts forgiven of, another company (that is not acting in its capacity of trustee.

  • Payments made to a shareholder/associate in their capacity as an employee (or associate of such an employee). Rather, the FBT provisions take precedence over Division 7A in the regard.

  • Debt forgiveness that results from a loan that has been treated as a dividend under Division 7A in the current year or a previous year.

  • A shareholders/associate is provided with a use of an asset (which can be considered a ‘payment’ or Division 7A purposes), but the use of the asset would otherwise be considered a ‘minor benefit’, would otherwise be allowable as a once-only deduction, or relates to the use of certain residences.

Also, if a deemed dividend does arise, the amount included in the shareholders/associates assessable income is broadly limited to the extent of the companies ‘distributable surplus’.

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