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Amanda Guruge, May 9 2022

Division 7A Deemed Dividends — Not just a tax issue

This article was originally posted on CCH iKnow and relates to a webinar run by Bruce Collins on the topic. 

Division 7A of the Income Tax Assessment Act 1936 is a part of the tax law that acts as specific anti-avoidance provisions, to prevent private companies from distributing cash and value to shareholders and associates, and attempting to avoid dividend taxation. Division 7Aonly applies to private companies and specifically focuses on loan, advances and other credits that are not otherwise taxed. In the SME space, this is bread and butter work for most accountants, tax agents, and tax advisors, with many small business operators falling within the Div 7A rules.

In our experience, most advisors get Div 7A right and if not, engage with the client and ATO to correct any non-compliance. What we have seen however is the interaction of other areas of law (non-tax) that can trigger significant Div 7A problems. In conjunction with CCH Learning, Bruce Collins from Tax Controversy Partners in Sydney will be running a session Division 7A Deemed Dividends – Not just a tax issue on Tuesday 29 March, at 1 pm, so if you have any pressing questions, register to join the session and ask Bruce.

History of Div 7A

First introduced on 4 December 1997, Div 7A would automatically deem certain payments/benefits provided by a private company to be an unfranked dividend, assessable to the shareholder or associate.

On 12 December 2002, Div 7A was expanded to transactions between trusts and companies, where the company became presently entitled to income of the trust, which would not be paid and the cash would be distributed to shareholders/associates.

On 1 July 2009, the Div 7A rules were extended to arrangements where interposed entities are used between trusts and shareholders/associates.

In October 2018, Treasury released a consultation paper “Targeted amendments to the Division 7A integrity rules”, in which Treasury proposed radical changes to the Div 7A regime as we understand it today. At the time, it was a hotly contested area amongst accountants and advisors, with no clear certainty on when further consultation would take place. But then the focus shifted to the 2019 Federal Election, then COVID-19, and here we are just before another Federal Election still dealing with the existing law, rather than the recommended changes.

When is a Div 7A deemed dividend triggered?

Any payments or benefits to a shareholder/associate by a private company triggers Div 7A, with 3 exceptions: 

How do I ensure the Div 7A loan is not treated as a deemed dividend?

Where a loan is made by a private company to a shareholder/associate it will not be treated as a deemed dividend where: 

A written loan agreement sounds difficult to organise — do I need to see a lawyer?

Most Constitutions come with a template for a Div 7A written “default” loan agreement, and alternatively, your accountant/tax agent will have a standardised template that can be used.

To meet the requirements of Div 7A, the written loan agreement must include: 

The written loan agreement must be signed and dated to be effective, like any other legal contract.

Unfortunately, many taxpayers try to rely on company Constitution clauses to cover associates of shareholders or new shareholders. The problem is that those people/entities are not signatories to the Constitution, so those “default” loan agreements will not meet the requirements of a signed written loan agreement for Div 7A purposes.

The shareholder cannot afford to continue paying the loan amounts (principal and interest) — what will happen?

Where the private company forgives a debt to a shareholder/associate, it will be treated as a dividend, unless: 

The interaction of non-tax laws with Div 7A will be the focus of Bruce’s CCH Learning session “Division 7A Deemed Dividends – not just a tax issue”. In practice, we have seen non-tax disputes, where Div 7A was not considered, resulting in unintended consequences. In the session, Bruce will be covering case studies on the following areas: 

To join the discussion on these often unintended Div 7A consequences, check out the CCH Learning session “Division 7A Deemed Dividends – not just a tax issue” for 1 CPD unit.

How can Tax Controversy Partners help you?

At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice and representation with the ATO to ensure you are protected. Please contact us for help using our online contact form, via email at admin@taxcontroversypartners.com.au or by phone at 02 8513 3813.

Written by

Amanda Guruge


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