Item 3: Division 7A

3.1 Overview

If you are a private company owner, under tax law you must treat your private expenses separately from your company expenses.

When buying or selling a private company, you must treat any advances, loans and other payments or credits to shareholders (or their associates) correctly.

Payments, loans and debts forgiven by a private company to shareholders and their associates may be treated as dividends under Division 7A of Part III of the Income Tax Assessment Act 1936.

For more information, read:

3.2 Debt forgiveness

Division 7A also applies to debt forgiveness.

If a private company forgives all or part of a debt owed by you when you are a shareholder or an associate of a shareholder, the debt may be treated as dividends under Division 7A.

Also, 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.

For an explanation of what debt forgiveness means and how it applies to CGT, refer to CGT and debt forgiveness.

3.3 Commissioner of Taxation's discretion

If you meet specific conditions, we may disregard a deemed dividend that would otherwise arise under Division 7A, or allow you to choose to frank the deemed dividend.

More information on the Commissioner's discretion to disregard operation of Division 7A can be found on our website.

3.4 Calculator and decision tool

Use the Division 7A calculator and decision tool to:

  • work out whether a direct transaction by a private company to a shareholder or their associate will be deemed a dividend
  • calculate the minimum yearly repayment required on a loan to avoid a deemed dividend arising under Division 7A
  • calculate the amount of the loan not repaid by the end of an income year.

Use the Division 7A calculator and decision tool.

For more information, visit Division 7A essentials.

    Last modified: 12 Jul 2016QC 20300