Division 7A

Division 7A refers to a part of the Income Tax Assessment Act 1936 relating to loans made from companies to shareholders or related entities. It is a wide reaching anti-avoidance provision which is intended to prevent tax-free distributions of company profits in the guise of loans which are either remain outstanding or are forgiven.

The provisions also affect loans made from companies to trusts.

Date of Effect

Generally, Div 7A loans made on or after the 4th of December 1997, or debts forgiven after that date, are subject to the Division 7A provisions. Loans that were made before the 4th of December 1997 that were subsequently increased or had their term extended after the cut off date, will be considered wholly made after 4th December 1997.

Consequences

The effect of Division 7A is that an amount will be treated as a deemed dividend in the income year it was outstanding, unless there is a valid written loan agreement in place, and the minimum repayments are made. You should seek advice from a professional tax accountant when determining your Division 7a tax liability.