Topics on Division 7A (1) – Legislative background (1)

In the Abichandani V FCT case, the AAT decided that when a company loans money to its shareholders or transfers property to a related entity, it's treated as if the company paid dividends under Division 7A of the Income Tax Assessment Act 1936.

This case shows the risks of using a private company for both business and personal finances. When a person mixes their personal and business money with the company's accounts, it can lead to problems, especially with Division 7A. It's a reminder to always have proper documentation when dealing with Division 7A, as it can be costly if overlooked.

According to Section 109D(1), a private company is seen as paying a dividend to someone if:

• The company gives them a loan during the year, and the person is a shareholder or related to a shareholder when they get the loan, or it seems like they got the loan because they were a shareholder before.
• The loan isn't fully paid back by the "lodgement day," which is the due date or the actual date the company files its tax return for that year.

There are some exceptions that might stop the company from having to pay dividends. One important exception is for commercial loans. If the loan follows certain rules, like being in writing and having regular payments, it might not count as a dividend.

If the company is considered to have paid a dividend under Section 109D(1), the amount of the dividend is the part of the loan that hasn't been paid back by the lodgement day. This amount can't be more than the company's available money to pay dividends, which is calculated under Section 109Y.

Got questions? Reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment on our live calendar.