Common Division 7A errors to avoid

The Tax Office has published a document outlining some common errors made that occur in relation to Division 7A (deemed dividends).

Funds from a shared bank account

Where a number of entities operate out of the same bank account, funds used from that account by shareholders or their associates may give rise to deemed dividends.

Intra-group loans for business purposes

Division 7A requires loans, including intra-group loans between a private company and a trust or partnership, to either have complying loan agreements in place or be fully repaid before the private company’s lodgement day. The “lodgement day” is the earlier of the due date for lodgement and the date of lodgement of the lender’s tax return for the year in which the loan is made.

Minimum yearly payment

Even where a complying loan agreement is in place, a deemed dividend may still arise if the minimum yearly repayment (worked out using the current year’s benchmark interest rate) is not made by the end of the income year.

Division 7A applies to associates of shareholders

Division 7A applies to both shareholders and their associates. The meaning of “associate” is broad, and includes the trustee of a discretionary trust where the shareholder is also a beneficiary of the trust, even if they have not actually received a distribution.

An unpaid present entitlement can be considered a loan

An unpaid present entitlement from a trust to an associated private company can amount to the provision of financial accommodation and, in turn, be considered a loan. While exceptions do apply, if the funds are not held on sub-trust for the sole benefit of the private company, or a complying

loan agreement is not entered into by lodgement day, they will be treated as a dividend paid by the private company to the trust.

If a mistake is made

If either a tax agent or a tax agent’s client makes a mistake and the mistake is identified before the lodgement day, the following actions may be taken to rectify the error:

• repay the loan
• put in place a complying loan agreement, or
• if it resulted from an unpaid present entitlement, establish a sub-trust arrangement.

If the mistake is identified after lodgement, there is an option to voluntarily disclose this. Where a deemed dividend arose due to an honest mistake or inadvertent omission, an application can be made requesting the Taxation Commissioner’s discretion to disregard the operation of Division 7A or allow the deemed dividend to be franked.

More information

The fact sheet in relation to the common Division 7A errors can be accessed here. Information about the Commissioner’s discretion can be obtained here. General information about the operation of Division 7A can be accessed here.

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