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  • Amounts that will not be treated as dividends

    Attention

    Warning:

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

    End of attention

    The following transactions will not be treated as a dividend:

    • a repayment of a debt owed by a private company to a shareholder or associate, provided the repayment is not more than the debt amount that would have been owed if the company and shareholder or associate had been dealing with each other at arm's length
    • a loan made in the ordinary course of a private company's business on the usual terms which it applies to arm's length loans of a similar type
    • a payment or loan which forms part of the assessable income of the shareholder or associate by virtue of some other provision of the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997)
    • a loan made during the course of winding up a company where the loan is either repaid or offset by distributions by the end of the income year following the year in which the loan is made
    • a payment or loan which has been specifically excluded from the assessable income of the shareholder or associate by virtue of an exempting provision in the ITAA 1936
    • a loan made solely for the purpose of enabling the shareholder or associate to acquire shares or rights to shares under an employee share scheme to which Division 13A of the ITAA 1936 applies
    • the forgiveness or release of a debt of a shareholder or associate under the Bankruptcy Act 1966.

    Excluded loans

    A loan is not treated as a dividend in the year the loan is made if before the lodgment day:

    • the loan is put under a written agreement
    • the rate of interest payable on the loan must be equal to or exceed the bank variable housing loan interest rate last published by the Reserve Bank of Australia before the start of the income year in which the loan was made
    • if the loan is secured by a registered mortgage over real property, the term of the loan must be no more than 25 years and the amount of the loan must not exceed 91% of the value of the property over which the security is provided - less any other liabilities for which the property also provides security, or
    • for all other loans, the term of the loan must be no more than seven years.

    Prior to the 2004-05 income year, the relevant provisions required that the written agreement be in place before any amount was advanced to the shareholder or associate. However, for loans made during the 1997-98 income year, this requirement was satisfied if the written agreement was put in place by 30 June 1998.

    All loans made during a year which are not treated as dividends at the end of the year and which have the same maximum term are, for tax purposes, amalgamated to form a single loan. Shareholders or their associates are required to make a minimum yearly repayment in respect of that amalgamated loan. The minimum repayment is calculated by using the formula set out in the legislation. A failure to make such a repayment will result in the outstanding amount of the loan being treated as a dividend to the extent of the private company's distributable surplus.

    Example: Loan with a private company

    A private company made an unsecured loan to a shareholder on 1 July 2003. The loan was made under a written agreement which specified that the rate of interest payable for all future years must equal or exceed the benchmark interest rate for the year. For 2004-05 the benchmark interest rate was 7.05% per annum.

    The term of the loan is five years. For the year ended 30 June 2004, as it met the criteria for minimum interest rate and maximum term, the loan is not treated as a dividend.

    If the amount of the loan not repaid at 30 June 2004 was $100,000, the minimum yearly repayment required for the 2004-05 income year is calculated as follows:

    (Amount of loan not repaid by end of previous income year multiplied by current year's benchmark interest rate) divided by the product of 1 minus (1 divided by 1 plus current year's benchmark interest rate) to the power of the remaining term

    Excluded loans example - basic formula

    (100,000 multiplied by 0.0705) divided by the product of 1 minus (1 divided by 1 plus 0.0705) to the power of 5

    = $24,421.73 (see note)

    Note: minimum yearly repayment required for the 2004-05 income year

    If repayments made in the 2004-05 income year equal or exceed the minimum yearly repayment, the amount of the loan not repaid at the end of the income year is not taken to be a dividend.

    End of example

    Amounts treated as dividends cannot exceed distributable surplus

    The private company's distributable surplus is the maximum amount that can be treated as a dividend. The company that made the payment or loan or forgave the debt will have to determine how much of the payment or forgiven debt is to be treated as having come from their distributable surplus. The distributable surplus is worked out at the end of the company's year of income using the following formula:

    Net assets − non-commercial loans (see note) − paid-up share value − repayments of non-commercial loans

    Note: Non-commercial loans are loans which have previously been treated as dividends.

    Hardship

    The Commissioner of Taxation has a discretion to disregard a failure to make a minimum yearly repayment.

    He also has a discretion to exclude a forgiven debt from being treated as a dividend. Finally, the Commissioner has the power to disregard a liability incurred under a guarantee provided by the private company to an entity other than a private company.

    Prevention of double taxation

    As a general rule, if a subsequent dividend paid by the private company is used to offset an amount that has already been subject to tax as a result of being treated as a dividend, that amount will not be included as assessable income.

    Example: Shareholder in a private company

    Simone is a shareholder in a private company, Martley Pty Ltd. She borrowed, on a non-commercial basis, $500 from the company in September 2003. The loan was not repaid by 30 June 2004. Simone included an amount of $500 as assessable income - as a dividend - on her 2003-04 tax return.

    In December 2004, Simone became entitled to receive an unfranked dividend of $1,100 from Martley Pty Ltd.

    However, Simone agreed that Martley Pty Ltd would offset $500 of her entitlement against the outstanding loan and pay the balance of $600 to her. Therefore, Simone is only required to include an amount of $600 in her assessable income for the 2004-05 year. This is because she had previously included the other $500 – the loan which had been treated as a dividend – on her 2003-04 tax return.

    End of example
    Last modified: 05 Mar 2020QC 27610