The ATO can potentially treat a payment or a loan by a private company to a shareholder or an associate (such as a family member) as an unfranked deemed dividend under Division 7A – unless an exemption applies or a formal loan agreement is in place requiring minimum interest and principal repayments.

The meaning of the term loan can include any of the following:

  • An advance of money
  • A provision of credit or any other form of financial accommodation
  • A payment made to a shareholder or their associate
  • A payment made on behalf of a shareholder of their associate
  • Any transaction (irrespective of its terms of form) that is the same as a loan of money.

A loan is acknowledged as being made at the time the amount of the loan is paid by any of the above means.

If a company makes more than one loan to a shareholder or associate in a financial year, it may be taken to have made an amalgamated loan to that shareholder or associate.

There are various things a private company can do before the due date of lodgment for its income tax return to minimise the risk of a shareholder or an associate deriving a deemed dividend for the tax year.

Depending on the circumstances, these strategies may include the following:

  • repaying a loan,
  • declaring a dividend or
  • entering a complying loan agreement before the return’s due date of lodgement.

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