• Division 7A - trust amounts treated as dividends - payments and loans through interposed entities

    About this fact sheet

    This fact sheet provides information on arrangements where a private company has an unpaid present entitlement to net income from a trust estate and Subdivision EA of Division 7A of Part III of the Income Tax Assessment Act 1936 (Subdivision EA) applies. This fact sheet also provides information on payments and loans made by the trustee to a shareholder or an associate of a shareholder of the company through one or more interposed entities rather than directly to the shareholder or their associate.

    It also discusses when a private company is taken or deemed to be presently entitled to the net income of a trust estate where one or more trusts are interposed between the private company and the trust estate.

    The rules in Subdivision EA apply to certain trust arrangements involving payments, loans and debts forgiven 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 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. As well as including ordinary loans, a 'loan' includes 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 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 in respect of its unpaid present entitlement, it will be taken to make a loan to the trustee of the trust for Division 7A purposes.

    The Australian Taxation Office (ATO) does 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 TR 2010/3.

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    Division 7A of Part III of the Income Tax Assessment Act 1936 (Division 7A) was amended to introduce interposed entity rules to ensure that the operation of Subdivision EA of Division 7A (Subdivision EA) could not be circumvented by interposing entities. The changes apply to payments and loans made on or after 1 July 2009.

    The following terms are used throughout this fact sheet:

    • First interposed entity: the entity to which the trustee makes a payment or loan.
    • First interposed trust: for arrangements relating to entitlements through interposed trusts, the first interposed trust is that which has net income that the company is or becomes presently entitled to.
    • Interposed entity: an interposed entity is any entity interposed between the trustee and a shareholder, or an associate of a shareholder of the company. An entity includes an individual, company, partnership or trust.
    • Target entity: a shareholder or an associate of a shareholder of the company to whom the trustee's payment or loan is ultimately directed.
    • Target trust: for arrangements relating to entitlements through interposed trusts, the target trust is the trust whose net income the company is taken to be, or to become, presently entitled to.

    For an overview of Division 7A, Subdivision EA, payments, loans and the meaning of 'associate' refer to the following fact sheets:


    In applying Division 7A to payments, loans and debts forgiven, where it is determined that Subdivision EA applies, the trust (or target trust for arrangements relating to entitlements through interposed trusts) 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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      Last modified: 15 Jul 2010QC 23183