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Edited version of private advice
Authorisation Number: 1051853045949
Date of advice: 29 June 2021
Ruling
Subject: Division 7A - deemed dividends - associate of shareholder
Question
Are the payments from the Company bank account subject to Division 7A of the Income Tax Assessment Act 1936 and treated as dividends under section 109C for the year ended 30 June 20XX?
Answer
Yes.
This ruling applies for the following period periods:
Year ended 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
The Company made payments to an associate of a shareholder in the 20XX income year.
There is no complying loan agreement.
No repayments were made.
Relevant legislative provisions
Division 7A of Part III of the Income Tax Assessment Act 1936
Section 109C of the Income Tax Assessment Act 1936
Reasons for decision
Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates).
A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A even if the participants treat it as some other form of transaction such as a loan, advance, gift or writing off a debt.
Specifically, a private company is taken to have paid a dividend to an entity under section 109C of the ITAA 1936 if the company has made a payment, or loan to, or forgiven the debt of, an entity in an income year and in that year either:
a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or
b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.
Section 318(1)(a) of the ITAA 1936 provides that an associate of an entity includes a relative of the entity.
In your case, the Company made payments to an associate of a shareholder.
There was no complying loan agreement and no repayments were made.
The payments will therefore be deemed to be dividends and be assessable income in the year of receipt.