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Dealing with Div 7A loans: A different approach


When a private company makes a loan to a shareholder or an associate during an income year, Div 7A of the Income Tax Assessment Act 1936 (Cth) can deem the company to have paid a dividend. The dividend is assessable to that shareholder/associate. However, no deemed dividend will arise if the loan is either repaid or placed under a complying loan agreement before the due date for lodgment of the company’s income tax return for that year (or the actual date of lodgment, if earlier). A common way of making each year’s minimum repayment on a Div 7A loan is to set it off against a dividend of the same amount declared by the company.

This article sets out an alternative approach whereby the loan is fully repaid at the outset in the same manner, and the client borrows from the bank to pay the top-up tax arising on the dividend. This may actually leave your client better off.

Author profile

David Montani CTA
David is Nexia Australia’s National Tax Director, providing tax technical and strategic support to Nexia offices across Australia. Prior to commencing this role in 2019, David had 26 years of experience in taxation and business advisory, with the last 15 years in specialist taxation consulting, leading Nexia Perth's Tax Consulting Division. Particular areas of specialty include business restructures, property transactions, Capital Gains Tax, Division 7A and business sales. David's approach is to deliver solutions-based outcomes that assist clients in making important decisions concerning their businesses. - Current at 22 October 2020
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