Payments or benefits treated as dividends under Division 7A can be assessable income of the shareholder or their associate in the form of unfranked dividends.
Division 7A dividends are generally not frankable even though they are taken to have been paid out of the company's profits. This means that the company can't attach a franking credit to the dividend, and the payment has no impact on the company's franking account.
However:
- a dividend that is taken to have been paid because of a family law obligation is frankable
- if the Division 7A dividend arises because of an honest mistake or inadvertent omission, you can apply to allow it to be franked (see ATO relief).
If the dividend is franked, a dividend statement indicating the value of the dividend and the amount of franking credit must be provided by the private company. A payment or benefit treated as a Division 7A dividend is taken to have been paid as a dividend at the end of the income year in which it was provided.
Calculating the value of a transfer or use of an asset
The amount of such a payment is the amount that would have been paid for the transfer or provision of the asset by parties dealing at arm's length, less any amount actually paid. For information on how to calculate an arm's length value see Market valuation for tax purposes.
Division 7A dividends limited to company's distributable surplus
The total of all dividends a private company is taken to pay under Division 7A during an income year is limited to its distributable surplus for that year.
Note that a company's profit or retained earnings and its distributable surplus will not necessarily be the same.
For information on how to work out the distributable surplus see Division 7A - distributable surplus.
Later dividends
A later dividend arises where a private company distributes a dividend to the shareholder that it doesn't actually pay but is applied to repay some or all of a loan that has been treated as a Division 7A dividend in a previous income year.
- If unfranked, the amount of the later dividend set-off is not included in the shareholder's assessable income.
- If franked or partly franked, the later dividend is included in the shareholder's assessable income to the extent that it is franked.
For example, a private company makes a loan of $100 to a shareholder in the 2006–07 income year that is taken under Division 7A to be a dividend paid on 30 June 2007. In the 2007–08 income year, the company distributes to the shareholder an unfranked dividend of $100 (the later dividend) that it sets off against the shareholder's $100 loan. The effect of the set off is that no amount of the later dividend is taken to be a dividend. Accordingly, the later dividend is not included in the shareholder's assessable income in the 2007–08 income year.
Payments or benefits treated as dividends under Division 7A can be assessable income of the shareholder or their associate in the form of unfranked dividends.