Deemed dividends

Deemed dividends from private companies



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Where certain transactions between a private company and a shareholder or shareholder's associate occur, 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 Payments treated as dividends.

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 are widely defined and 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
  • companies which are controlled or influenced by the person.
Last modified: 12 Jan 2005QC 27523