The Australian Taxation Office has released a Taxation Ruling – Division 7A Loans: Trust Entitlements. The ruling expresses the Commissioner of Taxation’s opinion on the circumstances in which a private company with a “present entitlement to an amount from an associated trust”, makes a loan to that trust in circumstances where funds representing that present entitlement remain intermingled with funds of the trust.
Division 7A is a provision of the Income Tax Act which involves companies and non-company tax payers. In very broad terms, it creates a loan between a company and an associated tax payer whenever the company does any of the following with the associated tax payer:
- loans money;
- advances money;
- provides credit to or any other form of financial accommodation; or
- makes a payment on their behalf.
Where a Division 7A loan arises, then it will become a “deemed automatic dividend” to the associated tax payer, unless a seven year unsecured or 25 year secured loan agreement is put in place before the relevant income tax return is lodged.
If you currently conduct business via a trust structure, this ruling may affect you.
At the end of the year, you may distribute profits to a company, but do not actually give the company the physical cash. This specific scenario is identified in the Taxation Office ruling and will be treated as a Division 7A loan which will result in an “automatic deemed dividend” being paid by the company to the associated tax payer, ie the Trust.
This applies for trust distribution to companies made after 16 December 2009. You can avoid the treatment of the distribution as a dividend if you implement a new Division 7A loan agreement each financial year – but this may lead to other problems.
If you are operating your business through a trust, this is a complex matter and will have major implications regarding your trust 2010 and future income tax returns, and possibly your current business structure. If you are operating through a trust, we recommend you contact your accountant for reviews of the matters as it affects your particular circumstances at your earliest opportunity.
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Article by Christie Lewis
Christie is Practice Manager at Alan Lewis Accountants . Besides accounting, her passion is for all things small business (and blogging, of course). You can contact Christie directly at christie@lewistaxation.com.au.
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