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Distributable surplus within Div 7A

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Q: A client who took a $30,000 loan from his company last year. At the end of the year, the company had no net assets. It made a profit of around $60,000 but retained losses offset this and there was no distributable surplus. How to deal with this in the accounts? Does it need to include an unfranked dividend for the loan, apply it to the loan in the balance sheet, reduce it to nil and not declare the dividend in the shareholder return as it is not taxable? Or need to leave the loan in the balance sheet, not declare any dividend, mark it as being assessed for Div 7A purposes? In the following year, the taxpayer made another loan to himself of $5,000. The company made a loss of $32,000. How is the distributable surplus calculated if I have left the loan in the account for the $30,000 from last year?

2016 balance sheet looks like this:

  • Total assets: $112,000 (includes $30,000 loan for last year and $5,000 this year)
  • Total liabilities: $140,877 (paid-up share capital of $4,000).

 

A: In the first year, there would appear to be no Div 7A implications based on the company had no distributable surplus in that year (ITAA 1936 s 109Y). In the accounts, the amount can be shown as a loan to the shareholder of the company. No unfranked dividend needs to be declared as Div 7A of ITAA 1936 does not apply. In the second year, the company had no distributable surplus. Thus, there should be no Div 7A consequences from the making of the further loan by the company to its shareholder. Overall, the company would still seem to have no distributable surplus

Tags: Division 7A

Written by Panbo Ye

I help people discover POWERFUL unknowns in Tax Ideas | Wealth Strategies | Retirement Planning | Finance Solutions!

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