Division 7A Deemed Dividends

Under Division 7A, payments made to associated entities that have not been paid back before the company has lodged a return (or when it is due to lodge one); AND no valid loan agreement is in place, a deemed dividend is taken to have been made in the year the payment was made.

The deemed dividend is reduced to the extent of the company's distributable surplus (s109Y).

The effects of a deemed dividend is that the borrower will have to take the payment as a fully assessable unfranked dividend and must declare it in their individual tax return. The dividend will reduce retained earnings in the company and franking credits may actually be wasted which effectively doubles taxation.

The Commissioner does not have to declare these dividends, it is automatically deemed. Failing to declare it could amount to tax evasion. Tax agents that help cover it up may be liable for malpractice and guilty of other taxation offences.

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