Div 7A And Unpaid Shareholder Loan

Q&A Tax

Question :

ABC Pty Ltd is a private company. There are two shareholders in the company each hold 50% of the
shares.

In the last financial year, one shareholder borrowed money from the company and did not repay earlier
than the lodgement date. Plus, no Div7A loan agreement was put in place. Therefore, the company
accountant treated it as deemed dividends – unfranked.

The question is: does the business need to pay deemed unfranked dividends to both shareholders or
only to the shareholder who took a loan from the company in the financial year? Does it trigger Division
7A?

 

Answer :

When Division 7A is triggered this causes the shareholder or associate who borrowed the money from
the company to be treated as if they had received a deemed unfranked dividend from the company.
This is not a real dividend – it is just a notional dividend that is recognised for tax purposes only.

If there are two shareholders and only one of them borrowed money from the company and this
triggered Division 7A then you should only recognise the deemed unfranked dividend in the tax return
of the shareholder who borrowed the money. Refer to section 109D ITAA 1936.

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