Division 7A is part of the Income Tax Assessment Act 1936 and is intended to prevent profits or assets being provided to shareholders or their associates tax free. The operation of Division 7A
A payment or other benefit provided by a private company to a shareholder (or their associate) can be treated by the ATO as a dividend for income tax purposes, and therefore render this amount assessable. This can apply 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 can also apply when a private company provides 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 Division 7A deemed dividend is generally unfranked. Given this, the most effective way to provide a payment or other benefit to a shareholder or their associate is to pay it as a normal dividend (with a franking credit if available) and for the shareholder to include it in their assessable income.
Division 7A doesn’t apply to amounts that are assessable to the shareholder or their associate under other parts of the income tax law, such as normal dividends or director’s fees.
Related issues Division 7A does not apply to shareholder or associate payments in their capacity as employees. In such situations fringe benefits tax (FBT) may apply instead of Division 7A. Division 7A does apply to loans and debt forgiveness provided to shareholders or their associates even where such benefits are provided in their capacity as an employee or as an associate of an employee. To avoid double taxation, such benefits are not subject to FBT.
Note that payments and other benefits treated as Division 7A dividends are generally not subject to dividend withholding tax or PAYG withholding.
Payments and other benefits taken to be Division 7A dividends are generally unfrankable distributions unless they are provided under a family law obligation. The Commissioner has a general discretion to allow a Division 7A dividend to be frankable if it arises because of an honest mistake or inadvertent omission.
Payments and other benefits provided by a private company to shareholders or their associates as a result of divorce or other relationship breakdowns may be treated as Division 7A dividends and are assessable income of the recipient.
However, such payments or other benefits are treated as frankable dividends if provided under a family law obligation, such as a court order under the Family Law Act 1975, a maintenance agreement approved by a court under that Act or court orders relating to a de facto marriage breakdown.
Seminar: Division 7A
Division 7A is currently at the forefront of the ATO’s audit activities. In addition, numerous legislative changes are afoot relevant to the operation and mechanics of Division 7A. These seminars offer a comprehensive overview of the scope and application of Division 7A with a particular focus on proposed changes and Div 7A’s application to trusts bearing unpaid present entitlements (UPEs) in favour of corporate beneficiaries.
Where/when: Melbourne, Tuesday 25 July, 2017 Sydney, Wednesday 26 July, 2017 Time: 9.00am – 12.00pm AEST CPD: 3 hours Member price: $299.00 (inc GST) Non-member price: $350.00 (inc GST)
Melbourne
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Sydney
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Bonus videos
The following videos (that have CPD value), which deal with Division 7A matters, were developed by the ATO in response to feedback from tax professionals received during webinars that it hosted. The resulting videos were produced with an aim to help practitioners manage their clients’ Division 7A matters.
Common mistakes Assistant Commissioner Fiona Dillon discusses common Division 7A mistakes that can be avoided by keeping your clients’ personal and company finances separate (4.30 minutes).
Payments What a “payment” is, and how it is treated under Division 7A (5.45 minutes).
Complying loans Assistant Commissioner Fiona Dillon discusses complying loans under Division 7A (6 minutes).
Commissioner’s discretion If your client makes an honest mistake or inadvertent omission related to Division 7A, you should encourage them to apply for the Commissioner’s discretion (7.30 minutes).
To access the ATO’s Division 7A calculator and decision tool, click here.
The operation of Division 7A The operation of Division 7A The operation of Division 7A
# [assessable income], [deemed dividends], [div 7a], [division 7A]
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