Division 7A Loans on Ordinary Commercial Transactions

A recent draft determination has brought into the spotlight specific situations where the ATO will determine a payment or loan to be a deemed dividend under Division 7A.

An example is where a company pays a dividend to a second company, who does not have a distributable surplus, and that second company loans funds to an associate.

The Commissioner has considered that a reasonable person may conclude that this payment to the interposed entity could be made solely as part of an arrangement to divert profits to a shareholder.

In particular, the Draft Determination has singled out interposed entities without a distributable surplus as situations where this consideration will be considered.

To rectify this situation, you may need to either;

- repay the loan, or

- enter into a loan arrangement with a minimum interest rate and maximum term in accordance with Div 7A rules.

For further information please contact your RCB Advisors team member.

Sources:

Australia Taxation Office (https://www.ato.gov.au/law/view/document?docid=DXT/TD2017D3/NAT/ATO/00001)