Division 7A & Deemed Dividends in Income Tax Assessment

If you are a business owner and borrow money from the business, you need to ensure that you have dealt with the tax implications of Division 7A of the Income Tax Assessment Act 1936.

Division 7A concerns advances, loans and other payments or credits to shareholders (or their associates), unless the payments come within statutory exclusions. Division 7A also has relevance to an unpaid present entitlement from a trust. Examples of Division 7A being relevant include:

• a loan from the company to a shareholder; and • a shareholder uses an asset of the company for

private purposes (eg. a boat, a holiday house).

The most common (and costly) mistakes made by people preparing their own loan documentation are:

• the loan documentation does not meet all the legislative requirements;

• the loan documentation was executed too late; • loans from a trust were not considered; • additional loans in later years are not considered; • repayments which are made are insufficient, or paid

too late.

Division 7A is relevant to companies, corporate limited partnerships and trusts. If the correct loan documentation is not put in place which complies with the requirements of the tax law, these payments are treated as assessable dividends to the recipient and this can have large tax consequences for the taxpayer, which may include additional administrative penalties of up to 95% of the amount of the undeclared tax and interest until the amount is unpaid.

These type of transactions are an area which the ATO are maintaining a continuous focus upon and in our experience, many taxpayers fail to attend to dealing with the loan documentation, or their business records are not properly maintained.

There may also be other possible tax consequences of a transaction such as fringe benefits tax.

The Commissioner has a discretion not to treat an amount as a deemed dividend in certain circumstances.

Contact us for your Division 7A issues

Our team of experts can provide you with strategic advice in relation to Division 7A and assist you with any required loan documentation