• Division 7A - Debt forgiveness by private companies

    About this fact sheet

    This fact sheet provides more information about debts forgiven by private companies to shareholders and associates of shareholders. It includes amendments to Division 7A which apply from the 2009-10 income year.

    For an overview of the provisions of Division 7A and the meaning of 'associate', refer to the fact sheet Division 7A - an overview. The overview fact sheet includes a summary of the amendments made to Division 7A with effect from 1 July 2009.

     

    Attention

    Division 7A applies to payments made, loans made and debts forgiven by:

    • a non-resident private company to an Australian resident shareholder (or their associate)
    • closely-held corporate limited partnerships in the same way it applies to private companies, but only for payments made, loans made and debts forgiven on or after 1 July 2009. For more information, refer to Division 7A - closely held corporate limited partnerships.
    End of attention

    AttentionPractice Statement Law Administration PS LA 2006/2 (GA) on the operation of Division 7A on loans that have become statute barred advises that the Commissioner has decided to take no active compliance action that would treat statute barred private company loans made prior to the enactment of Division 7A as giving rise to a deemed dividend under Division 7A.

    End of attention

    A private company may be taken to pay a dividend to you at the end of the company's income year if during that year it forgives all or part of a debt owed by you when you are a shareholder or an associate of a shareholder. If the debt is forgiven after you cease to be a shareholder or their associate, it may still be a dividend if a reasonable person would conclude that the debt was forgiven because you were a shareholder or their associate at some time.

    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. From the 2009-10 income year amounts of debts forgiven that are taken to be a dividend under Division 7A will be included in the calculation of the distributable surplus. For more information, refer to the fact sheet Division 7A - distributable surplus.

     

    Attention

    In this fact sheet a reference to a shareholder or their associate is also a reference to:

    • an entity that has been a shareholder
    • an entity that has been an associate of a shareholder.
    End of attention

     

    Further Information

    Division 7A also applies to certain debts forgiven by trustees to a shareholder or an associate of a shareholder of a private company where the company is presently entitled to an amount from the net income of the trust estate and the whole of that amount has not been paid by a specified date. For more information, refer to the fact sheet Division 7A - trust amounts treated as dividends - debt forgiveness.

    End of further information
      Last modified: 12 Aug 2010QC 17349