• When will a payment or loan through an interposed entity be treated as a dividend?

    A private company is taken to make a payment or loan to a target entity where:

    • the private company makes a payment or loan to an interposed entity (called the 'first interposed entity')
    • a reasonable person would conclude that the private company made the payment or loan solely or mainly as part of an arrangement involving a payment or loan to the target entity, and
    • the first interposed entity or another interposed entity makes a payment or loan to the target entity.

    The private company may be taken to pay a dividend to the target entity (subject to the private company's distributable surplus) in the same way as if it had made a payment or loan directly to the target entity (see the fact sheets Division 7A - Payments by private companies and Division 7A - Loans by private companies).

    This arrangement is shown below.

    Arrangement diagram

    Private company taken to pay dividend to target entity where arrangement exists to channel payment / loan to target entity via one or more interposed entities.

    Division 7A operates as if the private company had paid an amount or made a loan to the target entity.

    For the 2006-07 and later income years a loan agreement between the last interposed entity and the target entity that meets the Division 7A criteria for written loan agreements will be treated as a loan agreement between the private company and the target entity for the purposes of Division 7A. This enables the notional loan to be an excluded loan (see 'What if the loan the interposed entity makes to the target entity is under a written agreement and meets certain criteria?')

      Last modified: 21 May 2013QC 17352