Trust loans, payments and forgiven debts treated as dividends
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Division 7A also includes rules in Subdivision EA which are designed to ensure that a trustee cannot shelter trust income at the prevailing company rate by creating a present entitlement to an amount of net income in favour of a private company without distributing it and then distributing the underlying cash to a shareholder (or their associate) of a private company.
If you are a shareholder or an associate of a shareholder of a private company and Subdivision EA applies, then an amount may be included in your assessable income as if it were a dividend if the trustee of a trust estate:
- makes a payment to you that discharges or reduces a present entitlement to an amount that is attributable to an unrealised gain, or
- makes a loan to you, or
- forgives a debt in favour of you, and
- the private company has an unpaid present entitlement from the trust estate.
In applying Subdivision EA to payments, loans and forgiven debts, the trust is treated as a private company for the purpose of determining whether an amount treated as a dividend arises. To enable this, there is a modified application of the general Division 7A provisions.
The amount included as an unfranked dividend in your assessable income is the lesser of:
- the actual amount of the payment, loan or forgiven debt
- the amount of the unpaid present entitlement less any amounts that have been treated as dividends because of previous applications of Subdivision EA or amounts taken to be loans under section 109UB of the ITAA 1936 which is the predecessor of Subdivision EA
- the distributable surplus of the private company with the unpaid present entitlement.
However, Subdivision EA does not apply in all circumstances where there is an unpaid present entitlement. In some circumstances where Subdivision EA does not apply where a private company has an unpaid present entitlement to an amount of income from a trust, the general provisions of Division 7A may be applicable. This is where:
- the entitlement arose after 15 December 2009
- the trustee of the trust is a shareholder or an associate of a shareholder of the private company
- for that entitlement, the private company provides financial accommodation to the trustee of the trust, or enters into a transaction with the trustee of the trust which in substance effects a Division 7A loan. This can occur in circumstances where funds representing the unpaid present entitlement remain intermingled with funds of the trust.
For more information on whether the Division 7A rules apply to you, see the Division 7A essentials, including Division 7A - trust amounts treated as dividends - payments and loans through interposed entities and Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements.