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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