The following transactions will not result in a deemed dividend:
- a repayment of a debt owed by a private company to a shareholder or associate, provided the amount of the debt does not exceed the amount the company would have owed if the company and shareholder or associate had been dealing with each other at arm's length
- a loan made in the ordinary course of a private company's business on the usual terms which it applies to arm's length loans of a similar type
- a payment or loan which forms part of the assessable income of the shareholder or associate by virtue of some other provision of ITAA 1936 or the Income Tax Assessment Act 1997
- a loan made during the course of winding up a company where the loan is either repaid or offset by distributions by the end of the income year following the year in which the loan is made
- a payment or loan which has been specifically excluded from the assessable income of the shareholder or associate by virtue of an exempting provision in ITAA 1936
- a loan made solely for the purpose of enabling the shareholder or associate to acquire shares or rights to shares under an employee share scheme to which Division 13A of ITAA 1936 applies
- the forgiveness or release of a debt of a shareholder or associate under the Bankruptcy Act 1966.
Excluded loans
Loans which meet the following criteria are not treated as dividends in the year the loan is made:
- The loan must be made under a written agreement.
- The rate of interest payable on the loan must be equal to or exceed the bank variable housing loan interest rate last published by the Reserve Bank of Australia before the start of the income year in which the loan was made.
- If the loan is secured by a registered mortgage over real property, the term of the loan must be no more than 25 years and the amount of the loan must not exceed 91 per cent of the value of the property over which the security is provided-less any other liabilities for which the property also provides security.
- For all other loans, the term of the loan must be no more than 7 years.
The relevant provisions require that the written agreement be in place before any amount is advanced to the shareholder or associate. However, for loans made during the 2001-02 income year, this requirement will be satisfied if the written agreement was put in place by 30 June 2002.
All loans made during a year which are not treated as dividends at the end of the year and which have the same maximum term are, for tax purposes, amalgamated to form a single loan. Shareholders or their associates are required to make a minimum yearly repayment in respect of that amalgamated loan. The minimum repayment is calculated by using the formula set out in the legislation. A failure to make such a repayment will result in the outstanding amount of the loan being treated as a deemed dividend to the extent of the private company's distributable surplus.
Example
A private company makes an unsecured loan to a shareholder on 1 July 2000. The loan is made under a written agreement which specified that the rate of interest payable for all future years must equal or exceed the benchmark interest rate for the year. For 2001-02 the benchmark interest rate was 6.8 per cent per annum.
The term of the loan is 5 years. For the year ended 30 June 2001, as it met the criteria for minimum interest rate and maximum term, the loan is not treated as a dividend.
If the amount of the loan not repaid at 30 June 2001 was $100,000, the minimum yearly repayment required for the 2001-02 income year is calculated as follows:
=$24,258.61
= minimum yearly repayment required for the 2001-02 income year.
If repayments made in the 2001-02 income year equal or exceed the minimum yearly repayment, the amount of the loan not repaid at the end of the income year is not taken to be a dividend.
End of exampleDeemed dividend cannot exceed distributable surplus
The private company's distributable surplus is the maximum amount that can be treated as a deemed dividend. The company that made the payment or loan or forgave the debt will have to determine how much of the payment or forgiven debt is to be treated as having come from their distributable surplus. The distributable surplus is worked out at the end of the company's year of income using the following formula:
Net assets − non-commercial loans − paid-up share value − repayments of non-commercial loans
Non-commercial loans are loans which have previously been treated as deemed dividends.
Hardship
The Commissioner of Taxation has a discretion to disregard a failure to make a minimum yearly repayment. He also has a discretion to exclude a forgiven debt from being treated as a dividend. Finally, the Commissioner has the power to disregard the creation of a present liability under a guarantee provided by the private company to an entity other than a private company.
Prevention of double taxation
As a general rule, if a subsequent dividend paid by the private company is used to offset an amount that has already been subject to tax as a deemed dividend, that amount will not be included as assessable income.
Example
Simone is a shareholder in a private company, Martley Pty Ltd. She borrowed, on a non-commercial basis, $500 from the company in September 2000. The loan was not repaid by 30 June 2001. Simone included an amount of $500 as assessable income-as a deemed dividend-on her 2000-01 tax return.
In December 2001, Simone became entitled to receive an unfranked dividend of $1,100 from Martley Pty Ltd. However, Simone agreed that Martley Pty Ltd would offset $500 of her entitlement against the outstanding loan and pay the balance of $600 to her. Therefore, Simone is only required to include an amount of $600 in her assessable income for the 2001-02 year. This is because she had previously included the other $500-the loan which had been treated as a deemed dividend-on her 2000-01 tax return.
End of exampleTrustee loans
Where a trustee makes a loan to a shareholder or associate of a private company and the private company is a beneficiary of the trust, a deemed loan may arise if:
- the private company is or has been presently entitled to an amount from the net income of the trust estate
- the trustee has not paid the amount to the private company
- the trustee has made a loan to a shareholder of the private company or an associate of the shareholder after the time that the private company first became presently entitled to that amount.