Laws relating to loans by companies to shareholders or related entities are one of the most complex and frustrating areas of tax for small businesses and it’s important not to wait until the end of the financial year to take stock.
Called Division 7A, these provisions of the Tax Act are intended to prevent tax-free distributions of company profits in the guise of loans or payments.
A loan or payment deemed to be a dividend under Division 7A is required to be included in the assessable income of the recipient as an unfranked dividend.
You may recall the saga last year with the ATO’s ruling on “unpaid present entitlements.”
This ruling broadly considered certain unpaid distributions from trusts to private companies to be a ‘loan’ from the company to the trust. Where this ‘loan’ is made to a trust under which shareholder/s of the same company benefit, a “deemed dividend” may result.
If you own shares in a private company and that company made a distribution to a trust that you benefit under between 16 December 2009 and 30 June 2010, one of the ways to avoid the resulting deemed dividend is for the trust to put the unpaid present entitlement on “sub-trust” for the benefit of the company on or before 30 June 2011.
Other options are also available but if you might be caught in this trap, you should seek advice before 30 June to make sure the situation is managed in your best interests.
The other trap to watch for is a change that was put through last year that made the value of being provided with a private company asset (such as a holiday house) for use by a shareholder (or an associate) a deemed dividend.
If any private company assets have been so used in the past financial year, you will need to consider the value of the resulting deemed dividend.
You may also need to consider whether those assets should be moved out of the company.