A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A even if the participants treat it as some other form of transaction such as a loan, advance, gift or writing off a debt.
Division 7A extends the meaning of ‘loan’ to include:
- an advance of money
- a provision of credit or any other form of financial accommodation
- a payment for a shareholder or their associate, on their account, on their behalf, or at their request if they have an obligation to repay the amount; and
- a transaction (whatever its terms or form) that is the same as a loan of money.
Pre 4 December 1997 loans
At present, loans made before 4 December 1997 generally will not be subject to Division 7A. However, where a loan is varied on or after 4 December 1997, either by extending the term of the loan or increasing the amount of the loan, the loan will be treated as if it were a new loan entered into on the day it is varied and therefore Division 7A may apply.
Treasury has recently released a consultation paper regarding the proposed changes of the Division 7A provision. One of the proposals is to treat the pre-04/12/1997 loans as financial accommodation as at 30 June 2021. Financial accommodation falls within the extended definition of a loan under Division 7A. The taxpayer will have until the lodgement day of the 2020-21 company tax return to either pay out the amount of the pre-04/12/1997 loan or put in place a complying loan agreement, otherwise it will be treated as a dividend in the 2020-21 income year. The first repayment will be due in the 2021-2022 financial year.
Division 7A may also apply where the loan is forgiven on or after 4 December 1997. A loan will generally be treated as being forgiven in circumstances where it has become statute-barred under the relevant Limitations Act. Generally, a loan becomes statute-barred when the period within which a creditor is entitled to sue for recovery for the debt ends. It is expected that many loans made before 4 December 1997 would already have been statute barred and thus have given rise to a deemed dividend for the borrower.
To determine whether a loan has become statute barred is a legal question. If you have a substantial pre-04/12/1997 loan, you should check with our legal team to confirm whether the loan has been subjected to the statute of limitations, and hence already have been forgiven by the company.
For outstanding pre-1997 loans, which have not already been forgiven and continue to be reported in tax returns, the proposed changes will provide the affected borrower with a two year grace period before the first repayment is due, with the loan to be repaid over the subsequent 10 years.
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