Division 7A of the ITAA 1936 is an integrity measure aimed at preventing private companies, including non resident private companies, from making tax-free distributions to shareholders (or their associates).
If you are a shareholder or an associate of a shareholder in a private company which makes a payment or loan to you or forgives a debt that you owe the company, the company will be taken under Division 7A to have paid you a dividend unless the payment or loan came within specified exclusions.
Division 7A does not apply to the payment if the payment is made to you in your capacity as an employee.
There are a number of exclusions which are detailed in the Division 7A essentials. For example, the following transactions will not be treated as dividends:
- payments of genuine debts
- loans where the loan is put under a qualifying written agreement (meeting minimum interest rate and maximum term criteria) before the private company’s lodgment day. In such cases, however, minimum yearly repayments are required to avoid amounts treated as dividends arising in later years
- payments or loans that are otherwise included in your assessable income or specifically excluded from assessable income, by virtue of some other tax law provision.
In Division 7A there are broad definitions for ‘payment’ and ‘loan’. Payment, for example, is now defined to include the provision of a private company asset for use by you.
Subject to the private company’s distributable surplus, the amount of the dividend will generally be equal to:
- the payment made
- the amount of the loan that has not been repaid before the private company’s lodgment day
- the amount of the debt which has been forgiven
If the amounts are treated as dividends you will need to include them in your tax return as an unfranked dividend. In certain circumstances, the dividend may be franked. For example, a dividend paid because of a family law obligation may be franked.
The Commissioner has a discretion to disregard the amount treated as a dividend if it arose because of an honest mistake or inadvertent omission by you, the private company or any other entity whose conduct contributed to that result.
In Division 7A there are also rules relating to payments and loans made through interposed entities and guarantees.
An amount treated as a dividend is not subject to either withholding tax or PAYG withholding and is not a fringe benefit.
For more information on whether the Division 7A rules apply to you, see the Division 7A essentials.
From 1 July 2009, Division 7A applies in relation to loans or payments made, or debts that are forgiven by a closely-held corporate limited partnership to partners or the partner’s associates. For more information refer to the fact sheet, Division 7A - closely held corporate limited partnerships.