Transactions that will be treated as dividends
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Payments treated as dividends
Subject to certain exceptions, payments made by a private company to a shareholder or associate that are treated as 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, and
- a transfer of property to the shareholder or associate.
A payment does not include an amount which is a loan (see Loans treated as dividends below).
A payment may be converted to a loan before the private company's 'lodgment day' and as a result the Division 7A provisions relating to loans will apply.
Example 13: Payment treated as dividend
Steven owns shares in a private company, X Pty Ltd. On 30 June 2010, 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 Unfranked amount item 11 on her 2010 tax return.
Loans treated as dividends
If a private company has made a loan to a shareholder or associate during the 2004-05 or later income years and the loan is not fully repaid before the 'lodgment day', the outstanding amount of the loan will generally 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 Excluded loans. See also Amounts that will not be treated as dividends.
Subject to some exceptions a loan is not taken to be repaid if, at the time of the repayment, it was intended to obtain a loan from the private company of an amount similar to or larger than the repayment. Certain loans can be refinanced without being treated as a dividend.
Note: Loans made before the 2004-05 income year were required to be repaid by the end of the income year in which the loan was made, and not before the 'lodgment day'. However, for the 2003-04 income year only, Practice Statement Law Administration PS LA 2005/3 (GA) - Division 7A - extended timeframe for repayment of a loan or execution of a written loan agreement for the 2003/04 income year sets out an administration concession, allowing repayment by the 'lodgment day'.
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, and
- 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.
The 'lodgment day' is the earlier of the due date for lodgment and the date of lodgment of the private company's tax return for the income year in which the loan was made.
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Example 14: Loans treated as dividends
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 2009-10 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 before the lodgment day, no amount will be treated as a 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.
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 dividend or was a debt owed to it by another company.
Last modified: 29 Jun 2010QC 27989