As a shareholder, you are likely familiar with dividends, when a business gives a shareholder loans or benefits that can also be treated as a dividend for income tax purposes. Division 7A is a provision of the Income Tax Assessment Act 1936 that is meant to prevent these dividends from being tax-free.
So, what is Division 7A, and when does it apply to businesses and shareholders?
Division 7A is part of the Australian Income Tax Assessment Act 1936 that applies to certain payments, loans and debt forgiveness to prevent private companies from giving tax-free profits to shareholders.
If the loan does not meet the Division 7A requirements, it could be treated as an unfranked dividend and be subjected to income tax when passed to the shareholder. This is to prevent private companies from distributing profits to shareholders without paying the correct income tax.
All of the requirements must be met to be considered a Division 7A loan:
If it does not meet the above conditions the loan could be considered a Division 7A dividend.
As a shareholder, you will also need to make sure that the loan minimum yearly repayment is made each year. If this repayment is not fully made for each year then the shortfall amount would also be treated as a Division 7A dividend for that year.
A Division 7A deemed dividend is typically unfranked, so a way to provide a payment or other benefit to a shareholder is to pay it as a normal dividend (with a franking credit) and for the shareholder to include it in their assessable income.
The Division 7A interest rate is set by the Australian Taxation Office (ATO) every financial year, based on the benchmark interest rate set by the Reserve Bank of Australia (RBA) plus an additional margin of 7%.
You can also use the ATO Division 7A calculator to estimate the minimum yearly repayment you’ll need to make on your loan, including:
Before using the ATO calculator, you’ll need to gather the following information:
Division 7A applies when a company provides payments or other benefits to a shareholder which isn’t treated as a salary, wage, or dividend.
Division 7A loans can include:
If Division 7A applies, the payment, loan or other benefits will be treated as an unfranked dividend and subject to income tax once passed to the shareholder.
To determine whether Division 7A applies, consider the following:
If the answer to any of the above questions is yes, Division 7A likely applies, and you should seek professional advice to ensure compliance with the law.
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While every care has been taken to ensure the accuracy of the information presented as at 12 April 2024, Intuit is not providing you with professional advice and we recommend you obtain your own professional advice. Intuit is not liable for your use of the information presented.
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