Subdivision EA will operate differently depending on the type of benefit provided to the shareholders or their associates. The types of benefits Subdivision EA applies to are:
- payment
- loan
- repayment
- debt forgiveness.
Payments and loans through trusts
A payment or loan provided by a trustee may be treated as a dividend where both:
- the trustee makes a payment or loan to a shareholder of a private company or their associate
- the private company has a UPE to an amount of trust income at lodgment day of the trust's tax return for the income year in which the payment or loan is made.
A payment to a shareholder or associate won't result in a deemed dividend unless the payment is a discharge or, or a reduction in, a present entitlement of the shareholder or associate that is attributable to an unrealised gain. This does not apply to loan repayments made as part of certain arrangements.
Provision of payments and loans through interposed entities
In some circumstances, the provision of a benefit may be deemed. This happens where the arrangement involves a chain of payments or loans through other entities.
Where a trust makes payments or loans to shareholders or their associates (the target entity) through one or more interposed entities, Division 7A operates as if the trustee had paid the amount or made the loan directly to the target entity.
The trustee is deemed make a payment or loan to a shareholder or associate if:
- at least one entity is interposed between the trust and the shareholder or associate (target entity)
- the trustee provides a payment or loan to one of the interposed entities
- one of the interposed entities provides a payment or loan to the target entity
- a reasonable person would conclude that the trustee made the payment or loan solely or mainly as part of an arrangement involving the provision of benefit to the target entity
- the interposed entity may provide the payment or loan to the shareholder or associate before, at the same time, or after the trustee provides the payment or loan to the interposed entity.
Where this applies, the trustee is taken to have made the payment or loan at the time the interposed entity made the payment or loan to the shareholders or associates.
Example 5 – Benefits provided through interposed entities
Trading Company Pty Ltd has an unpaid present entitlement from Family Trust. Family Trust makes a payment to Interposed Trust, which makes a loan to Jay, a shareholder of Trading Company Pty Ltd. The notional transaction between Family Trust and Jay is a loan because the transaction between Jay and Interposed Trust is a loan.
It does not matter:
- whether the interposed entity made the payment or loan to the target entity before, after or at the same time as the first interposed entity received the payment or loan from the trustee
- whether the amount paid or lent to the target entity is the same amount as the trustee paid or lent the first interposed entity.
Value of deemed loans and payments
The amount of the deemed payment or loan is determined by the Commissioner, who must take into account:
- the amount paid or lent to the shareholders or associates whether any part of that amount represented consideration payable to the shareholders or associates by either the trustee or an interposed entities
- the payment or loan cannot exceed the amount of the unpaid present entitlement the private company has from the trust. The amount must also be reduced by amounts that represent arm's length payments to the target entity by either the trustee or interposed entities
- any repayments made by the target entity to the interposed entity will be taken into account when working out the value of a loan.
Example 6 – Calculating the notional loan with repayments
Trading Company Pty Ltd has an unpaid present entitlement to $25,000 from the Family Trust.
On 10 July, the Family Trust makes a loan of $10,000 to the J & J Partnership under an arrangement in which the partnership will lend the amount to Jane, an associate of Jay who is a shareholder of Trading Company Pty Ltd.
On 15 July, the J & J Partnership lends Jane $15,000. Before the end of the income year Jane repays $3,000 to the J & J Partnership.
In this example, the J & J Partnership is the interposed entity and Jane is the target entity. The Family Trust is taken to make a notional loan to Jane of $10,000, as under the arrangement this was the amount lent to Jane by the J & J Partnership. The J & J Partnership lent an additional amount of $5,000.
The amount the Family Trust is taken to have loaned Jane is reduced by a proportion of the repayment Jane made to the J & J Partnership. The amount of the reduction is:
- $3,000 x ($10,000 / $15,000) = $2,000
The Family Trust is taken to have loaned Jane $8,000 (that is, $10,000 - $2,000). Subject to the distributable surplus of Trading Company Pty Ltd, $8,000 is included in Jane’s assessable income as if it were a dividend.
Debt forgiveness through trusts
A debt forgiven by a trustee may be treated as a dividend where both:
- the trustee forgives all or part of a debt which is owed by a shareholder or their associate
- the private company has a UPE to an amount of trust income as at the lodgment day of the trust's tax return for the income year in which the debt forgiveness is made.
The basic features of this type of arrangement are shown in the following diagram:
Debt forgiveness will not cause additional deemed dividends where:
- the forgiveness is for a loan that has previously been taken to be a dividend under Division 7A, former section 109UB or section 109G(3)(b)
- the same debt is forgiven at different times (only the first forgiveness is treated as a dividend).
Example 7 – Debt forgiveness
Kim is a shareholder of K Pty Ltd, and both are beneficiaries of the C Trust. On 29 March 2015, the C Trust forgives a $10,000 loan owed by Kim. At the time of the forgiveness, K Pty Ltd has a present entitlement to income from the C Trust of $60,000. This has not been paid by the lodgment day of the trust's tax return for the 2015 year. Kim may be treated as receiving an unfranked dividend of $10,000, subject to the distributable surplus of K Pty Ltd.
Example 8 – Forgiveness of a Division 7A loan
Anna is a shareholder of Elliot Pty Ltd, and both are beneficiaries of the Dawson Trust. In a previous income year, Anna received a loan from the Dawson Trust that resulted in an amount being included in her assessable income under Division 7A as a deemed dividend.
In a later income year, the Dawson Trust forgives the amount of the loan made to Anna. As the loan already resulted in an amount being taken to be a dividend under Division 7A, a new deemed dividend does not arise.
Example 9 – Former section 109UB amounts
Anthony is a shareholder of Tony Pty Ltd, and both are beneficiaries of the Z Trust. Tony Pty Ltd became presently entitled to $200,000 of trust income for the 2012 income year. That amount remains unpaid as at the earlier of the due date for lodgment or date of lodgment of the trust's tax return for the 2014 income year.
On 30 June 2012, the Z Trust makes a loan to Anthony of $130,000. Anthony was taken under the former section 109UB to receive a loan from Tony Pty Ltd of $130,000.
On 20 September 2013, the Z Trust lent Anthony an amount of $100,000 under a written agreement that meets the minimum interest rate and maximum term criteria for a Division 7A loan. On 14 April 2014, the Z Trust forgives the loan of $100,000.
For the purpose of determining the amount Anthony is taken to receive as a dividend in the 2014 year, the amount of the debt forgiveness is the lesser of:
- the $100,000 loan forgiven by the Z Trust in the 2014 income year
- the unpaid present entitlement to Tony Pty Ltd of $200,000, reduced by the $130,000 taken under the former section 109UB to be a loan from Tony Pty Ltd to Anthony in the 2012 year (that is, $70,000).
The amount of the debt forgiveness is therefore $70,000.
End of exampleSee also: