Loan or investment? Div 7A when company money used to fund the activities of a new entity


Q&A Tax

Question :

Mr C owns a private company. He is the sole director of the Company.

He wants to withdraw money from the company to invest in a newly established family trust
(discretionary trust).

The Trust will be making passive investments, such as real estate properties and shares

The Trust will not be making loans to the beneficiaries or related parties.

Mr C argues that the money loaned to the Trust is an investment.

Please advise if the money taken out by our client from his company will create a Division 7A

Please also advise if there is any solution for not treating the loan to the Trust as a Division 7A loan.


Answer :

The trust would be an associate of the shareholder as the shareholder is a beneficiary of the trust. As
such, the loan from the company to the trust, being an associate of the shareholder would be a Division
7A loan. This is so even if the borrowed funds will be used by the trust to acquire investments. Division
7A applies regardless of the use and purpose of the loan.

To avoid a deemed dividend to the trust, a complying loan agreement should be put in place between the
trust and the company by the company’s lodgement day for the income year in which the loan is made.

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