You might often have heard Division 7A mentioned as a very important section of the tax Act by your accountant and always wondered by it meant.
Division 7A deals with amounts paid, lent or forgiven by a private company to certain assoicated entities (including individuals) that are treated as dividends, unless they come within some specific exclusions.
A Division 7A deemed dividend is generally taken to be paid at the end of the income year in which the amount is paid, lent or forgiven and the amount is included in the assessable income of taxpayer.
It generally applies to amounts paid, lent or forgiven on or after 4 December 1997.
The consequences of falling within Division 7A for a taxpayer can be extremely costly, and it is important that tax planning and conderation is given to the issues before the end of the year. Over this series of blogs we will discuss some of the consequences of Division 7A as well as some of the ways to avoid it.
Where a shareholder or associate is paid an amount, lent or forgiven a debt by a private company that is covered by Division 7A the amount is treated as a deemed dividend at the end of the income year.
Division 7A treats three kinds of amounts as dividends:
- amounts paid by the company to a shareholder or shareholder’s associate
- amounts lent by the company to a shareholder or shareholder’s associate, and
- amounts of debts owed by a shareholder or shareholder’s associate to the company that the company forgives.
The amount of deemed dividend is included in assessable income of the shareholder or associate and is taxed at marginal rates. The Division 7A dividend is deemed to be paid out of company profits, and paid to the entity in the capacity as a shareholder, whether or not the entity actually was a shareholder.
A deemed dividend is assessable and is generally unfrankable.
As you can see the consequences of a deemed dividend can quite severe and add thousands of dollars to an individuals tax bill. Careful planning and strategies can be used to reduce the effects of Division 7A.
In a future blog we will discuss some of the exclusions to Division 7A, and some ways to structure a taxpayers affairs during an income year to avoid the consequences of Division 7A.