Can a payment be converted to a loan for Division 7A purposes?

Yes. Payments made in the 2006-07 and later income years can be converted to loans before the private company's lodgment day. If the payment is converted to a loan before the end of the private company's lodgment day, the payment is treated as a loan for the purposes of Division 7A.

  For further information on loans, refer to the fact sheet Division 7A - loans by private companies.

   The 'lodgment day' is the earlier of the due date for lodgment or the date of lodgment of the private company's tax return for the income year in which the loan is made.

 Example 1

Cody is a shareholder of Barbarian Pty Ltd. Cody is neither an employee nor an associate of an employee of Barbarian Pty Ltd. Barbarian Pty Ltd pays Cody's gym membership fees. Barbarian Pty Ltd is taken to pay a dividend to Cody because the payment of the fees is made on behalf of a shareholder. The amount of the dividend is subject to Barbarian Pty Ltd's distributable surplus.

Note: If Cody was an employee or an associate of an employee, FBT would apply instead of Division 7A.

Example 2

On 1 February 2007, Tom Pty Ltd pays $3,000 towards an overseas trip for Mary. Mary is a daughter of Jerry, who is a shareholder of Tom Pty Ltd. Neither Jerry nor Mary is an employee or an associate of an employee of Tom Pty Ltd. The payment is to a shareholder's associate. On 30 June 2007, Tom Pty Ltd is taken to pay a dividend of $3,000 to Mary, subject to Tom Pty Ltd's distributable surplus.

Example 3

In 2007-08, XYZ Pty Ltd pays the petrol expenses of a vehicle owned by shareholder Sally. Sally is not an employee of the company and is under no express or implied obligation to repay the amount. Sally and XYZ Pty Ltd have until before the lodgment day of the company's 2007-08 income tax return to convert the payment into a loan and repay it, or enter into a written agreement that meets the maximum term and minimum interest rate criteria for a loan to be an excluded loan.

XYZ Pty Ltd may need to undertake a journal entry in its accounting records to reflect the loan and reverse what may have been recorded as an expense in the financial statements for the 2007-08 income year. If these have been finalised, an adjustment to retained earnings may be required.

    Last modified: 27 Jul 2016QC 17340