Division 7A also includes rules in Subdivision EA which are designed to ensure that a trustee cannot shelter trust income at the prevailing company rate by creating a present entitlement to an amount of net income in favour of a private company without distributing it and then distributing the underlying cash to a shareholder (or their associate) of a private company.
You may include an amount in your assessable income as if it were a dividend if:
- you are a shareholder or an associate of a shareholder of a private company
- the private company has an unpaid present entitlement from a trust estate, and
- the trustee of the trust estate does one, or more, of the following
- makes a payment to you that discharges or reduces a present entitlement to an amount that is attributable to an unrealised gain
- makes a loan to you
- forgives a debt in your favour.
In applying Subdivision EA to payments, loans and forgiven debts, the trust is treated as a private company for the purpose of determining whether an amount treated as a dividend arises. To enable this, there is a modified application of the general Division 7A provisions.
The amount included as an unfranked dividend in your assessable income is the lesser of:
- the actual amount of the payment, loan or forgiven debt
- the amount of the unpaid present entitlement less any amounts that have been treated as dividends because of previous applications of Subdivision EA or amounts taken to be loans under section 109UB of ITAA 1936 which is the predecessor of Subdivision EA
- the distributable surplus of the private company with the unpaid present entitlement.
However, Subdivision EA does not apply in circumstances where the trust entitlement is considered to be either:
- discharged by reason of the settling of a sub-trust
- the provision of financial accommodation between the private company and trust (and therefore subject to the general Division 7A loan rules).
For more information on whether the Division 7A rules apply to you, see:
- Private company benefits – Division 7A dividends
- Division 7A – Interposed entities
- TR 2010/3W Income tax: Division 7A loans: trust entitlements
- TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation'?
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