Division 7A - trust amounts treated as dividends - payments
This fact sheet provides more information on payments made by a trustee to a shareholder or an associate of a shareholder of a private company (except where the shareholder or associate is a company) and where Subdivision EA of Division 7A of Part III of the Income Tax Assessment Act 1936 applies.
The rules in Subdivision EA apply to certain trust arrangements involving payments made on or after 12 December 2002. The rules are designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to an amount of net income in favour of a private company without paying it, and then distributing the underlying cash to a shareholder (or their associate) of the company.
However, Subdivision EA does not apply in all circumstances where there is an unpaid present entitlement.
For the purposes of Division 7A, the term 'loan' has an extended meaning. In addition to including ordinary loans, a 'loan' is defined to include the provision of credit, or any other form of financial accommodation, and transactions that in substance effect a loan of money.
From 16 December 2009, if a private company beneficiary with an unpaid present entitlement provides financial accommodation to the trustee of a trust, or enters into a transaction with the trustee of a trust which in substance effects a Division 7A loan, it will be taken to make a loan to the trustee of the trust for Division 7A purposes.
The ATO will not treat such an unpaid present entitlement that is considered to constitute a loan as one that remains unpaid for Subdivision EA purposes in situations where the trustee is a shareholder or an associate of a shareholder of the private company. As a result Subdivision EA does not apply for these unpaid present entitlements. For more information refer to Taxation Ruling TR 2010/3.
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This fact sheet includes an explanation of the amendments which apply from 1 July 2009 to certain trust payment and loan back arrangements. See below, What if a payment is made and is then loaned back to the trustee on or after 1 July 2009?
For an overview of the provisions of Division 7A, when Subdivision EA applies, payments and the meaning of 'associate', refer to the fact sheets:
In applying Subdivision EA to payments, loans and debts forgiven, the trust is treated as a private company for the purposes of determining whether a deemed dividend arises. To enable this to occur there is a modified application of the general Division 7A provisions.
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