Private company loans and other payments (Division 7 A ITAA 1936)
Purpose of Division 7A (deemed dividend) – to prevent private companies from making tax-free distributions of profits to shareholders or their associates. Payments, loans and debts forgiven to shareholders or their associates will be deemed to be dividends. Any distributions of the profit of the company through dividends will be assessable in the hands of the recipient.
Associates – like a family member, e,g, son, spouse
Company assets – cars, holiday homes, boats
Distributable surplus – profit that a company has at the end income year; Deemed dividend cannot exceed company’s distributable surplus
Genuine debts – payments discharging pecuniary obligations
Entity – can be an individual; a body corporate, a partnership, a superannuation; a trust etc.
Lodgement date – In here, it means the earlier of the lodgement and due date of the lodgement of the income tax return in the year
1. Payments and use of company assets that trigger Division 7 A
(Section 109 C ITAA 1936) treats payments and use of company assets as deemed dividends to the extent the company has a distributable surplus. Payments include provision of assets but loans are not payments
- Payments to private expenses of a shareholder (e.g. family holiday or private health insurance) – if the shareholder is also an employee, FBT rules apply
- Transfers of property for less than the amount that would have been paid in arm’s length dealing.
- Use of company assets unless the use of asset is considered minor and infrequent, in which case the minor benefit exemption in FBT applies
Exclusions: 1) genuine debts 2) payments to other companies 3) payments otherwise assessable 4) certain liquidator’s distribution
Loan not fully repaid by the lodgement date in which the loan was made.
2. Debt forgiveness
Section 109 F – a debt forgiveness to a shareholder that is a superannuation fund or individual gives rise to a deemed dividend.
Section 109 G ITAA 1936 – company-to-company debt forgiveness is specifically excluded.