Division 7A applies to certain transactions involving private companies and trusts with unpaid present entitlements. Generally, the unpaid present entitlement is an entitlement triggered by the payments, loans or debt forgiveness made to the beneficiary of a trust. As such, the beneficiary of a trust must pay the unpaid present entitlement out of the trust by filing its tax return. The unpaid present entitlement is then treated as a Division 7A dividend.
Transfers of property
Transfers of property are subject to Division 7A, a tax law that governs a wide range of transactions. These transactions include transfers of property between family members. They also include payments made by the parties to satisfy a court order. Fortunately, there are some exceptions. Among these exceptions are marriages and relationship breakdowns. In addition, after 1 July 2006, payments made by a transferor company are still classified as dividends, meaning the transferor company absorbs the tax.
In addition to transfers of property, Division 7A also applies to payments made by trusts to their beneficiaries. For example, if a trust borrows funds for the purchase of income-producing assets, the funds are subject to Division 7A. However, just because a private company makes a payment, it doesn’t mean that the cash movement is genuine.
Under Division 7A, payments made to a spouse under a matrimonial settlement are not treated as dividends. This includes transfers of property to a spouse. However, these payments may be subject to section 109J, a tax law that applies to payments made to a spouse under a marriage settlement.
One exception to this is the case where a company owns a holiday home, which it can use by its shareholders for free. In this case, the use of the holiday home is considered a “payment” under Division 7A, as it is considered a commercial use.
Other ‘payments’ in respect of marriage or relationship breakdown are caught by Division 7A
The Division 7A rules will catch a range of ‘payments’ made in relation to a marriage or relationship breakdown. These can include gifts, debt forgiveness, and other ‘payments’ of money or property. They can also apply to use of company assets for private enjoyment.
If you are a shareholder of a company, your payments to that company may be franked under Division 7A. Moreover, payments made under a family law obligation – such as a court order or a maintenance agreement – may be franked in the income year that you make them.
Loans made by trustees
Trustees can be involved in a wide range of financial arrangements. Some types of financial arrangements may be classified as a loan and others as a financial accommodation. In determining whether an arrangement is a loan or a financial accommodation, trustees must consider whether the transaction is made by a private company or a trust.
For example, trustees often distribute a share of their trust income to private company beneficiaries. In some circumstances, this can be a loan that may be treated as a Division 7A loan. In such a situation, the trustee may be forgiving a debt owed by a shareholder or associate of a private company.
In another scenario, a trust may use a loan to acquire income-producing assets. If the loan is made to a unit trust with unrelated parties holding units, it may be subject to division 7A. However, a loan may be deemed a dividend if it originates from a family company. When this happens, unit-holders of the trust may be liable for tax.
A recent change in the rules about Division 7A has clarified some issues and requirements. Under TD 2022/11, the trustee must structure the loan as a Division 7A loan. The loan should also be managed as a complying loan.
Loans made by closely-held corporate limited partnerships
A closely-held corporate limited partnership may be required to pay a dividend to a partner or associate of a partner. The amount of the dividend will depend on the distributions the partnership has received in the tax year. The dividend must be reported on the partner’s tax return.
Under the current tax law, division 7A applies to a wide range of transactions made by private companies, including those involving the supply of credit or other financial accommodations. A closely-held corporate limited partnership can make loans to its shareholders or to non-shareholders. In addition, loans made to a closely-held company can be treated as unfranked dividends.
If the company is non-resident, it can still make loans to Australian residents. However, if the loans are made to an associate of the shareholder, the loans could be subject to Division 7A. For example, if a family has offshore wealth in private companies, it may use the money to make loans to its members.
A closely-held corporate limited partnership may have a general partner and several limited partners. The partnership may be considered a closely-held corporation if it has fewer than 50 members, and each partner has an entitlement to 75% or more of the partnership income.
Refinancing is not disregarded for Division 7A purposes
A trust can be regarded as a company that has a loan for the purpose of purchasing income-producing assets. This loan interest is deemed to be income under the Division 7A regime. However, this does not mean that the loan is disregarded for Division 7A purposes. The interest paid on the loan can be offset against mutual obligations.
Unless a trust is set up as a separate legal entity, the division 7A rules apply to the payment. A payment is defined as the provision of an asset or transfer of a property. For example, a trust could provide a person with a personal asset and the trust would be deemed to have paid a dividend.
While the new rules have made it easier to reinvest income, there are still several nuances to be resolved. Small businesses should be able to reinvest income from their sales to fund their ongoing operations. The changes are intended to simplify the Division 7A regime and make it easier for small businesses to reinvest income as working capital.
A private company can pay dividends to shareholders and associates only if it has sufficient distributable surplus. The dividends must not be more than 50% of the company’s profit or loss for the income year. In addition, the private company may choose to frank the dividend if it is entitled to do so.
Maximum term of a division 7a loan
A Division 7A loan is a loan that a private company or an interposed entity makes to another entity. This loan has specific requirements. One requirement is that the loan must be repaid on the lodgement date. Another requirement is that the loan must be repaid in a maximum of seven years.
A Division 7A loan agreement must include the repayment terms. This includes the minimum loan principal and interest. The interest rate must be at least equal to the benchmark interest rate for the year. It is important to remember that this rate may not match the interest rate on the loan agreement. This is because the benchmark interest rate changes each year.
When preparing a Division 7A loan agreement, a business owner should consider the potential tax consequences. Although the business owner may have a legitimate reason for the loan, he or she must understand the tax implications. It is essential to prepare a Division 7A loan agreement that complies with all the necessary rules.
A division 7A loan may have a minimum term and a maximum term. It is also possible to switch loans partway through a seven-year term. However, it should be noted that the cost savings diminish as the loan term extends.