• What if the payment or loan by the private company to the first interposed entity is treated as a dividend?

    If the payment or loan from the private company to the first interposed entity is treated as a dividend, the private company is not taken to make a payment or loan to the target entity.

     

    Example 1

     

    On 1 March 2007, XYZ Pty Ltd makes a payment of $10,000 to the trustee of the Bean Family Trust. Two weeks earlier, the trustee had paid $10,000 to Kristy, an individual shareholder of XYZ Pty Ltd and a beneficiary of the trust. There was a verbal arrangement that XYZ Pty Ltd would compensate the trustee for the $10,000 paid to Kristy. For the income year ended 30 June 2007, XYZ Pty Ltd has a distributable surplus of $20,000.

    The trustee is an associate of Kristy because Kristy is a beneficiary of the trust. Therefore, XYZ Pty Ltd is taken to pay a dividend of $10,000 to the trustee of the Bean Family Trust - see the fact sheet Division 7A - Payments by private companies.

    XYZ Pty Ltd is not taken to make a payment to Kristy, otherwise the $10,000 would potentially be treated as a dividend twice.

    This example is shown below.

    Diagram of example

    Payment to target entity (Kristy) is not treated as a dividend because payment to first interposed entity (Bean Family Trust) is already treated as a dividend.

      Last modified: 21 May 2013QC 17352