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  • Deemed dividends

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    Deemed dividends from private companies

    Where certain transactions between a private company and a shareholder, or shareholder's associate, occur after 3 December 1997, they are deemed to create an unfranked dividend assessable to the shareholder or associate. The amount of the deemed dividend is generally limited to the private company's distributable surplus.

    Payments made to a shareholder or their associate in their capacity as an employee, or as an associate of an employee of the private company, are not subject to these rules.

    Shareholders and their associates to whom a payment or loan is made by a private company, or who have a debt forgiven by a private company, will need to have regard to the rules when considering their tax liabilities. Under the rules, 'payment' has an extended meaning. For more information read the section Transactions that will create deemed dividends.

    Transactions entered into before 4 December 1997 will continue to be subject to the previous law. This allows the Commissioner to treat a payment or loan by a private company as a dividend to the extent that he believes the payment or loan is a distribution of the company's profits.

    Shareholders and associates

    The shareholder or associate need not be a shareholder or associate at the time the transaction occurred, as long as a reasonable person would conclude that the transaction occurred because the person was a shareholder or associate at some time.

    The associates of a natural person include:

    • a relative of the person
    • a partner of the person
    • a partnership in which the person is a partner
    • a spouse
    • a child of a partner of the person
    • a trustee of a trust where the person-or another entity that is an associate of the person-benefits under the trust and
    • companies that are controlled or influenced by the person.
    Last modified: 23 Dec 2019QC 16138