Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates). In particular, advances, loans and other payments or credits to shareholders (or their associates) are, unless they come within specified exclusions, treated as assessable dividends to the extent that the private company has a distributable surplus.
The dividend is taken to be paid out of the private company’s profits to the recipient as a shareholder in the private company. However, no dividend is taken to be paid for withholding tax purposes.
In Division 7A there are rules relating to payments and loans made through interposed entities and guarantees. There are also provisions dealing with the interaction with fringe benefits tax (FBT), imputation and the prevention of double taxation.
Division 7A also includes rules designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to a private company without paying it and then distributing the underlying cash to a shareholder (or their associate) of the company. The trust is treated as a notional company and the general Division 7A provisions are modified to determine the amount to be included, as if it were a dividend, in the assessable income of the shareholder (or their associate). These rules are explained in the four fact sheets on trust amounts treated as dividends.
Division 7A has been amended on a number of occasions. The amendments with effect for the income year in which 1 July 2006 has occurred and for later years are highlighted in a table in this fact sheet. These latest amendments were made to reduce the extent to which taxpayers can trigger a deemed divided inadvertently and also to reduce compliance costs.
Division 7A operates automatically and the Commissioner of Taxation is not required to make a determination
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