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Division 7A and fringe benefits tax

When Division 7A and Fringe Benefits Tax Assessment Act 1986 both apply to a payment, loan or debt forgiven.

Last updated 7 February 2017

If a shareholder or an associate of a shareholder in a private company is an employee of that same company, the fringe benefits tax (FBT) provisions, instead of Division 7A, may apply to the payments and other benefits received by the shareholder or associate.

Payments

A payment will not be treated as a dividend under Division 7A where it is made by a private company to a shareholder or an associate of a shareholder, if the payment is made to the individual in their capacity as an employee or an associate of an employee.

This means that for payments, including the transfer of property, FBT can apply.

Superannuation contributions made by a private company for a shareholder or an associate of a shareholder in respect of their employment will not be subject to Division 7A and are generally not subject to FBT.

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Loans

Unlike payments, Division 7A applies in preference to FBT to loans made by a private company to a shareholder or their associate. This is the case even if:

  • the loan is made to the shareholder or their associate in their capacity as an employee or an associate of an employee, or
  • the loan is made in respect of the employment of an employee.

However, any loans not subject to Division 7A may be considered 'loan benefits' provided by an employer to employees and therefore FBT may apply. An employer provides a loan benefit if they give an employee a loan and charge no interest or a low rate of interest. A low rate of interest is one that is less than the FBT benchmark rate of interest. This rate is published each year, usually in April.

From 1 April 2007, a loan that is put on Division 7A complying loan terms will not be treated as a ‘loan benefit’ for FBT purposes, even if the interest charged is less than the FBT benchmark rate of interest.

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Debts forgiven

In general, a forgiveness of debt by a private company in respect of a debt owed by a shareholder or an associate of a shareholder is treated as a dividend under Division 7A, even if:

  • the shareholder or their associate owed the debt in their capacity as an employee or an associate of an employee, or
  • the forgiveness occurs in respect of the employment of an employee.

To the extent Division 7A does not apply, FBT can apply (for example) to 'debt waiver benefits' provided by an employer to employees. An employer provides a debt waiver fringe benefit if they waive or forgive an employee's debt (other than a genuine bad debt).

Double taxation is avoided because forgiven debts treated as dividends paid to a shareholder or their associates are excluded from the definition of a fringe benefit.

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QC17382