Payments made by a private company to a shareholder or associate which are treated as deemed dividends include:
- an amount paid or credited to the shareholder or associate
- an amount paid or credited on behalf of, or for the benefit of, the shareholder or associate
- a transfer of property to the shareholder or associate.
A payment does not include an amount which is a loan. The amount paid or credited is deemed to be a dividend to the extent of the private company's distributable surplus.
Steven owns shares in a private company, X Pty Ltd.
On 30 June 2003, X Pty Ltd made a payment of $5,000 to Steven's mother, Helen. Helen is not an employee of X Pty Ltd and she is not an associate of an employee of the company.
The payment will be taken to be an unfranked dividend paid to Helen and she must include the $5,000 as assessable income at S item 11 on her 2002-03 tax return.End of example
Loans treated as dividends
Note: On 12 December 2002 the Government announced that, with effect from that date, it would replace section 109UB of the Income Tax Assessment Act 1936 dealing with "certain trust amounts treated as loans" so as to improve its effectiveness and remove the unfairness associated with its operation. Section 109UB deems a loan made to a shareholder of a private company by the trustee of a trust estate to be a loan by the private company under certain circumstances. At the time of publication, legislation giving effect to this announcement has not yet been tabled.
If a private company makes a loan to a shareholder or associate in an income year and the loan is not fully repaid by the end of that income year, generally the outstanding amount of the loan will be regarded as a non-commercial loan and treated as an unfranked dividend to the extent of the private company's distributable surplus-unless it satisfies the criteria of an excluded loan as explained in the section Excluded loans.
A loan includes:
- an advance of money
- a provision of credit or any other form of financial accommodation
- an amount paid for, on account of, on behalf of, or at the request of, a shareholder or associate where there is an express or implied obligation to repay the amount
- a transaction that in substance effects a loan of money.
As a general rule, loans in existence before 4 December 1997 will not be treated as a dividend under the relevant provisions unless they are altered by extending the term or increasing the amount of the loan.
Vanessa is a shareholder in the private company, X Pty Ltd. Vanessa's credit card bills, totalling $10,000, are paid with company cheques throughout the income year and debited to her loan account. Interest is not payable on the balance of the loan account.
If Vanessa repays the $10,000 to X Pty Ltd by the end of the company's income year, no amount will be treated as a deemed dividend. If she does not repay any part of the $10,000, the full $10,000 will be treated as an unfranked dividend. If she repays $3,000, then $7,000 will be treated as an unfranked dividend.End of example
Forgiven debts treated as dividends
If a private company forgives, wholly or partly, a debt owed to it by a shareholder or associate, the amount forgiven will be treated as a dividend to the extent of the private company's distributable surplus at the end of its income year. This will not be the case if the debt has previously been treated as a deemed dividend.