Division 7A - Trust amounts treated as dividends - debt forgiveness
This fact sheet provides more information on forgiveness of debts owed to a trustee by a shareholder or an associate of a shareholder of a private company (except where the shareholder or associate is a company) where subdivision EA of Division 7A of Part III of the Income Tax Assessment Act 1936 applies.
The rules contained in subdivision EA apply to certain trust arrangements involving debt forgiveness on or after 12 December 2002. The rules are designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to an amount of net income in favour of a private company without paying it and then distributing the underlying cash to a shareholder (or their associate) of the company.
However, subdivision EA does not apply in all circumstances where there is an unpaid present entitlement.
For the purposes of Division 7A 'loan' has an extended meaning. In addition to including ordinary loans, a 'loan' is defined to include the provision of credit or any other form of financial accommodation and transactions that in substance effect a loan of money.
From 16 December 2009, if a private company beneficiary with an unpaid present entitlement provides financial accommodation to the trustee of a trust, or enters into a transaction with the trustee of a trust which in substance effects a Division 7A loan, it will be taken to make a loan to the trustee of the trust for Division 7A purposes.
The ATO will not treat an unpaid present entitlement that remains unpaid for subdivision EA purposes in situations where the trustee is a shareholder or an associate of a shareholder of the private company. As a result subdivision EA does not apply to such an unpaid present entitlement. For more information refer to Taxation Ruling 2010/3.
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This fact sheet includes an explanation of an amendment to the debt forgiveness provisions in Division 7A. This amendment applies to debts forgiven on or after 1 July 2009.
For an overview of the provisions of Division 7A, when subdivision EA applies, debt forgiveness and the meaning of 'associate' refer to the fact sheets:
In applying subdivision EA to payments, loans and debts forgiven, the trust is treated as a private company for the purposes of determining whether a deemed dividend arises. To enable this to occur there is a modified application of the general Division 7A provisions.
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