Division 7A are rules found in the Income Tax Assessment Act 1936 (Cth) and are intended to prevent profits or assets being provided to shareholders or their associates tax-free.

The main purpose is to stop company owners and associates from taking money or benefits out of the company in a tax-free way, such as displaying it as a loan when it is actually a distribution of profits. 

Division 7A can apply to loans from a company to shareholders or associates, payments or benefits provided by the company, and forgiveness of debts owed to the company.

If the rules are not followed correctly, the ATO can treat the amount as an unfranked deemed dividend. This means it is added to the recipient’s taxable income and taxed at their marginal tax rate with no franking credits. 

Division 7A is an important set of tax rules for private company directors and shareholders. Not complying with the rules can lead to unexpected and expensive tax bills. 

If a person takes money out of their company or uses its assets for private purposes and does not treat the payments, withdrawals, transactions or benefits in the following ways such as salary, wages, and directors fees, dividends, loans from your business or personal and private use of the company’s assets. It is likely that the Division 7A rules will apply. Payments will be treated as unfranked deemed dividends, which are untaxed payments paid to a person. Consequences include incurring an income tax liability on the dividends, and a person would not benefit from any attached franking credits. 

If a person is a director and a shareholder in a company and not an employee of the company. If a person, or their associate, takes money from the company or uses assets owned by the company and that transaction has not been undertaken and reported in an approved way, the ATO will consider that payment or the value of the benefit from using the company’s asset to be an unfranked or a deemed dividend. It is treated as an untaxed payment from the company to a person or their associate.

The company is not able to claim a tax deduction for the amount that is deemed an unfranked dividend. The whole dividend without any franking credit will be reported in an individual tax return. If it were an associate who took and used the money or assets for personal use, it would be reported in the associate’s tax return. Tax needs to be paid according to the appropriate rates.

Division 7A can apply when private companies provide a payment or benefit to a shareholder or associate through another entity, or if a trust has allocated income to a private company but has not actually paid it, and the trust has provided a payment or benefit to the company’s shareholder or their associate.

A payment or benefit that may be subject to Division 7A is not a dividend if it has been repaid or converted into a Division 7A complying loan by the company’s lodgment day for the income year in which the payment or benefit occurs.

About Post Author

Brian Walker

B.Acc., GradDipLegPrac, Juris Dr
Barrister & Accountant.
Former Criminal Defence Solicitor. Former Federal Prosecutor for the Commonwealth Director of Public Prosecutions prosecuting Commonwealth crimes relating to drugs and child exploitation. Former Australian Federal Police member litigating proceeds of crime matters. Former Australian Taxation Office employee investigating offshore tax evasion matters.

Post Created by Jesslyn Duong, paralegal.

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