Division 7A and Fringe Benefits Tax
If you are a shareholder or an associate of a shareholder in a private company and an employee of that same company, the Fringe Benefit Tax (FBT) provisions, instead of Division 7A, may apply to the payments and other benefits you have received.
FBT is payable by employers on those fringe benefits that are provided in place of, or in addition to, the salary or wages of employees. FBT is worked out on the value of the fringe benefits provided to employees or their associates in respect of the employee's employment.
A payment will not be treated as a dividend under Division 7A where it is made by a private company to a shareholder or an associate of a shareholder, if the payment is made to the individual in their capacity as an employee or an associate of an employee.
This means that for payments, including the transfer of property, FBT can apply.
Superannuation contributions made by a private company for a shareholder or an associate of a shareholder in respect of their employment will not be subject to Division 7A and are generally not subject to FBT.
Unlike payments, Division 7A applies in preference to FBT to loans made by a private company to a shareholder or their associate. This is the case even if:
- the loan is made to the shareholder or their associate in their capacity as an employee or an associate of an employee, or
- the loan is made in respect of the employment of an employee.
However, any loans not subject to Division 7A may be considered 'loan benefits' provided by an employer to employees and therefore FBT may apply. An employer provides a loan benefit if they give an employee a loan and charge no interest or a low rate of interest. A low rate of interest is one that is less than the FBT benchmark rate of interest. This rate is published each year, usually in April.
From 1 April 2007, a loan that is put on Division 7A complying loan terms will not be treated as a ‘loan benefit’ for FBT purposes, even if the interest charged is less than the FBT benchmark rate of interest.
In general, a forgiveness of debt by a private company in respect of a debt owed by a shareholder or an associate of a shareholder is treated as a dividend under Division 7A, even if:
- the shareholder or their associate owed the debt in their capacity as an employee or an associate of an employee, or
- the forgiveness occurs in respect of the employment of an employee.
To the extent Division 7A does not apply, FBT can apply (for example) to 'debt waiver benefits' provided by an employer to employees that are fringe benefits. An employer provides a debt waiver fringe benefit if they waive or forgive an employee's debt (other than a genuine bad debt).
Double taxation is avoided because forgiven debts treated as dividends paid to a shareholder or their associates are excluded from the definition of a fringe benefit.
If you need further assistance with Division 7A, you can:
- speak to your tax adviser
- phone 13 72 86 (tax practitioners only)
- phone 13 28 66
- write to us at PO Box 3000, Penrith NSW 2740.
If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service on 13 14 50 for help with your call.
If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13 36 77. If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300 555 727
What happens when Division 7A of Part III of the Income Tax Assessment Act and the Fringe Benefits Tax Assessment Act both apply to a payment, loan or debt forgiven by a private company to a shareholder or shareholder's associate.