• Dividends set off or applied against loans previously taken to be dividends

    108. What is the tax treatment of a dividend (the later dividend) distributed by a private company, if some or all of the later dividend is set off against an amount previously taken under Division 7A to be a dividend paid by the company?

    If the later dividend is an unfranked dividend, the later dividend is not included in the assessable income of the shareholder to the extent it is set off against an amount previously taken under Division 7A to be a dividend paid to the shareholder.

    For the 2006-07 and following income years, the law has been amended to also cover cases where a later unfranked dividend is applied against an amount previously taken under Division 7A to be a dividend paid to an associate of a shareholder. In such cases, the amount applied is not included in the assessable income of the shareholder.

    However, if the later dividend is a fully or partly franked dividend, the dividend forms part of the shareholder or shareholder's associate's assessable income to the extent it is franked.

    For example, a private company makes a loan of $100 to a shareholder in the 2006-07 income year which is taken under Division 7A to be a dividend paid on 30 June 2007. In the 2007-08 income year, the company distributes an unfranked dividend of $100 to the shareholder (the later dividend) which it sets off against the shareholder's $100 loan. The effect of the set off is that no amount of the later dividend is taken to be a dividend. Accordingly, the later dividend is not included in the shareholder's assessable income in the 2007-08 income year.

    (See section 109ZC.)

      Last modified: 14 Sep 2010QC 16852