Consequences of Division 7A: Part 2

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.

    Other blogs in this series:

    What is Division 7A? Part 1

    This article has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances please contact our office.