Division 7A - Payments and loans by interposed entities involving guarantees
This fact sheet discusses the types of arrangement in which a private company indirectly distributes money to a shareholder or an associate of a shareholder by guaranteeing a loan a third party makes to the shareholder or their associate. More complex arrangements that involve a guarantee and a payment or a loan through a chain of third parties interposed between the private company and a shareholder or an associate of a shareholder are also discussed.
Under certain conditions, these arrangements may result in the private company being taken to make a payment to the shareholder or shareholder's associate. The private company may then be taken to pay a dividend to the shareholder or shareholder's associate.
For an overview of the provisions of Division 7A and the meaning of 'associate', refer to the fact sheet Division 7A - Overview.
The overview fact sheet includes a summary of the amendments made to Division 7A with effect for the income year in which 1 July 2006 occurred and for later years. In this fact sheet, the first year in which the amendments apply is referred to as the 2006-07 income year.
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The total of all dividends a private company is taken to pay under Division 7A is limited to its distributable surplus for that income year. For more information, refer to the fact sheet Division 7A - Distributable surplus.
Where a deemed dividend arises under Division 7A in the 2001-02 or a later income year because of an honest mistake or inadvertent omission, the Commissioner has a general discretion to disregard the deemed dividend (subject to conditions being complied with), or allow the private company taken to pay the dividend to choose to frank the dividend. See the fact sheet Division 7A - Exercise of Commissioner's discretion under section 109RB to disregard the operation of Division 7A or allow a deemed dividend franked.
The following terms are used throughout this fact sheet.
- Interposed entity - a third party which is interposed between the private company and a shareholder or an associate of a shareholder. An entity includes an individual, a company, a partnership or a trust.
- Target entity - a shareholder or their associate to whom a payment or loan is ultimately made.
Details of the types of arrangement discussed in this fact sheet are located under the following headings:
Arrangements in which a private company makes, rather than guarantees, a loan to a shareholder or an associate of a shareholder through one or more third parties are discussed in the fact sheet Division 7A - Payments and loans through interposed entities.
In this fact sheet, a reference to a shareholder or their associate is also a reference to:
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- an entity that has been a shareholder, or
- an entity that has been an associate of a shareholder.