• Division 7A - Trust amounts treated as dividends - Loans

    About this fact sheet

    This fact sheet provides more information on loans made by a trustee to a shareholder or an associate of a shareholder of a private company (except where the shareholder or associate is a company) and where subdivision EA of Division 7A of Part III of the Income Tax Assessment Act 1936 applies.

    The rules in subdivision EA apply to certain trust arrangements involving loans made 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.

    Attention

    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 Australian Taxation Office (ATO) will not treat such an unpaid present entitlement that is considered to constitute a loan as a 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 has no application for such an unpaid present entitlement. For more information refer to Taxation Ruling 2010/3.

    End of attention

    For an overview of the provisions of Division 7A, loans when subdivision EA applies, and the meaning of 'associate' refer to the fact sheets:

    Attention

    Certain payments made in the 2006-07 and later income years can be converted to loans before the trust's lodgment day. If the payment is converted to a loan before the end of the trust's lodgment day then the payment is treated as a loan for the purposes of Division 7A.

    End of attention
    Attention

    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 including those relating to loans and amalgamated loans.

    End of attention

     Further Information Subdivision EA also applies to certain payments and loans made on or after 1 July 2009 by a trustee to a shareholder or an associate of a shareholder through interposed entities. For more information, refer to  Division 7A - trust amounts treated as dividends - payments and loans through interposed entities.

     

      Last modified: 18 Aug 2010QC 17634