Tax & Superannuation: Company Tax - Guides
Company Tax
5. Deemed Dividends
Last updated: 10 Jul 2015
- Company tax law is even more complex when a payment or a loan is made to a shareholder of a private company (or an associate of a shareholder of the company) or where the company forgives such a loan.
- Under Division 7A of the Income Tax Assessment Act 1936 payments, loans or loans that are forgiven by a private company are ‘deemed’ to be dividends paid to the shareholder (or their associate) and tax must be paid on these amounts by that shareholder or associate.
- A loan made by a company to an entity will be taken to be a dividend paid during the current year if:
- the company makes a loan to the entity during the current year; and
- the loan is not fully repaid before the tax return for the company is lodged; and
- the company is not prevented from being taken to pay a dividend at the end of the current year; and
- either:
- the person is a shareholder in the company or an associate of such a shareholder when the loan is made; or
- a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the person has been such a shareholder or associate at some time.
- However the company will not be entitled to a deduction on these loan amounts. The ‘deemed dividend’ cannot be franked and therefore the benefit of company tax paid on the deemed dividend will be lost.
- The ‘deemed dividend’ rules can be avoided if appropriate documentation is put in place for loans that apply to:
- payments or loans to shareholders or their associates; or
- the forgiveness of such loans.
- A legally binding loan agreement that sets out arrangements between the company and the relevant shareholder before the end of the financial year would be considered appropriate documentation.
- Not all amounts paid or loans forgiven to a shareholder will result in deemed Division 7A dividends. The amount of the deemed Division 7A dividend cannot be more than the company’s ‘distributable surplus.’ If the company has no ‘distributable surplus’ there cannot be any deemed Division 7A dividend.
- Company tax law is even more complex when a payment or a loan is made to a shareholder of a private company (or an associate of a shareholder of the company) or where the company forgives such a loan.
- Under Division 7A of the Income Tax Assessment Act 1936 payments, loans or loans that are forgiven by a private company are ‘deemed’ to be dividends paid to the shareholder (or their associate) and tax must be paid on these amounts by that shareholder or associate.
- A loan made by a company to an entity will be taken to be a dividend paid during the current year if:
- the company makes a loan to the entity during the current year; and
- the loan is not fully repaid before the tax return for the company is lodged; and
- the company is not prevented from being taken to pay a dividend at the end of the current year; and
- either:
- the person is a shareholder in the company or an associate of such a shareholder when the loan is made; or
- a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the person has been such a shareholder or associate at some time.
- However the company will not be entitled to a deduction on these loan amounts. The ‘deemed dividend’ cannot be franked and therefore the benefit of company tax paid on the deemed dividend will be lost.
- The ‘deemed dividend’ rules can be avoided if appropriate documentation is put in place for loans that apply to:
- payments or loans to shareholders or their associates; or
- the forgiveness of such loans.
- A legally binding loan agreement that sets out arrangements between the company and the relevant shareholder before the end of the financial year would be considered appropriate documentation.
- Not all amounts paid or loans forgiven to a shareholder will result in deemed Division 7A dividends. The amount of the deemed Division 7A dividend cannot be more than the company’s ‘distributable surplus.’ If the company has no ‘distributable surplus’ there cannot be any deemed Division 7A dividend.
- Company tax law is even more complex when a payment or a loan is made to a shareholder of a private company (or an associate of a shareholder of the company) or where the company forgives such a loan.
- Under Division 7A of the Income Tax Assessment Act 1936 payments, loans or loans that are forgiven by a private company are ‘deemed’ to be dividends paid to the shareholder (or their associate) and tax must be paid on these amounts by that shareholder or associate.
- A loan made by a company to an entity will be taken to be a dividend paid during the current year if:
- the company makes a loan to the entity during the current year; and
- the loan is not fully repaid before the tax return for the company is lodged; and
- the company is not prevented from being taken to pay a dividend at the end of the current year; and
- either:
- the person is a shareholder in the company or an associate of such a shareholder when the loan is made; or
- a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the person has been such a shareholder or associate at some time.
- However the company will not be entitled to a deduction on these loan amounts. The ‘deemed dividend’ cannot be franked and therefore the benefit of company tax paid on the deemed dividend will be lost.
- The ‘deemed dividend’ rules can be avoided if appropriate documentation is put in place for loans that apply to:
- payments or loans to shareholders or their associates; or
- the forgiveness of such loans.
- A legally binding loan agreement that sets out arrangements between the company and the relevant shareholder before the end of the financial year would be considered appropriate documentation.
- Not all amounts paid or loans forgiven to a shareholder will result in deemed Division 7A dividends. The amount of the deemed Division 7A dividend cannot be more than the company’s ‘distributable surplus.’ If the company has no ‘distributable surplus’ there cannot be any deemed Division 7A dividend.
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