• The Subdivision EA rules as they apply to loans

    The type of arrangement that is subject to the new rules and may result in a loan by a trust being treated as a dividend is where:

    • the trustee of a trust estate makes a loan on or after 12 December 2002 of an amount to a shareholder or an associate of a shareholder of a private company (except where the shareholder or associate is a company)
    • the private company is presently entitled to an amount from the net income of the trust estate:
      • for loans between 12 December 2002 and 19 February 2004 at the time of the loan
      • for loans on or after 19 February 2004 by the earlier of the due date for lodgment or date of lodgment of the trust's tax return for the year in which the loan is made
       
    • the trustee has not paid the amount of the present entitlement to the private company before the earlier of the due date for lodgment or the date of lodgment of the trust's tax return for the income year in which the loan is made.

    The basic features of such an arrangement are shown in the diagram below:

    Arrangement diagram

    Example 1

    Kathy is a shareholder of K Pty Ltd, a private company. On 29 March 2007, Kathy receives a $10,000 loan from the C Trust. At the time of the loan, K Pty Ltd has an unpaid present entitlement (for subdivision EA purposes) of $60,000 due from the C Trust and this has not been paid by the earlier of the due date for lodgment or date of lodgment of the trust's tax return for the 2007 year. The loan received by Kathy may be treated as an unfranked dividend of $10,000, subject to the distributable surplus of K Pty Ltd.

    For information on the meaning of 'loan' refer to Division 7A - loans by private companies.

    What if the private company is not presently entitled to an amount of net income at the time the loan is made?

    If the loan is made on or after 19 February 2004 and the private company is not presently entitled to an amount from the net income of the trust estate, a dividend may arise. This will be the case if the private company becomes presently entitled to an amount from the net income of the trust estate and this remains unpaid at the earlier of:

    • the due date for lodgment
    • the date of lodgment of the trust's tax return for the income year in which the loan is made.

    If the loan is made on or after 12 December 2002 but before 19 February 2004 and the private company is not presently entitled to an amount from the net income of the trust estate at the time of the loan, Division 7A will not apply.

    Example 2

    John is a shareholder of A Pty Ltd, a private company. On 7 May 2004, John receives a $50,000 loan from the B Trust. At the time of the loan the B Trust had no unpaid present entitlement to net income due to A Pty Ltd. However, the trustee of the B Trust makes A Pty Ltd presently entitled to net income of $100,000 on 30 June 2004. The B Trust lodged its tax return for the 2004 income year on 14 May 2005, the due date for lodgment. As at 14 May 2005, the present entitlement remained unpaid.

    The loan is made on or after 19 February 2004 and the private company becomes presently entitled to an amount from the net income of the trust estate before the earlier of the due date for lodgment or the date of lodgment of the trust's tax return for the 2004 year (being the income year of the trust in which the loan is made). The present entitlement also remains unpaid. Therefore, John may be treated as receiving an unfranked dividend of $50,000, subject to the distributable surplus of A Pty Ltd.

    Example 3

    The same facts as in example 2 except that John received the $50,000 loan on 26 May 2003.

    In this case, John receives the loan on or after 12 December 2002 but before 19 February 2004 and, at the time of the loan, A Pty Ltd is not presently entitled to an amount from the net income of the trust which remains unpaid. Therefore, John is not taken to receive an unfranked dividend because of the loan.

      Last modified: 18 Aug 2010QC 17634