Division 7A Dividend - Amounts Caught

Amounts Caught

The amounts caught by the Division 7A rules include payments made by a private company to the shareholder or on behalf of a shareholder, and debts forgiven by the company. The rules also apply to payments etc. made to or for an associate of the shareholder.

Furthermore, payments etc. made by the company to an interposed entity, which then makes a payment etc. to the shareholder or an associate of the shareholder, would also be caught, if a reasonable person would conclude that the payment etc. was solely or mainly a part of an arrangement involving a payment etc. to the shareholder. But if a payment to the interposed entity is a dividend, then the amount of the dividend payment is exempt.

Amounts covered by qualifying commercial loans, which must be in place on the company’s tax return lodgment day, are exempt from the Division 7A rules. If a qualifying commercial loan is in place, the amount covered by that loan reduces the amount caught by the Division 7A rules by the amount repaid by that date.

Where a payment is made to a shareholder (or their associate) in their capacity as an employee or an associate of an employee, Division 7A does not apply. Instead fringe benefits tax (FBT) may apply.

The company may be taken to have paid a Division 7A dividend to the shareholder equal to the amount caught by the Division 7A rules, limited to the private company’s distributable surplus. The ATO can include the balance as an unfranked dividend of the shareholder or, in certain circumstances, as a franked dividend.