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Division 7A: Some thinking from the ATO on Division 7A implications for "former shareholdersand associates"

Just as advisors and their clients are reviewing whether they need to take corrective action on their compliance with Division 7A, the Commissioner has released a new draft tax determination on the potential application to former shareholders and associates. This may mean more clients will need to take corrective action to avoid deemed dividends. Paul Ellis

Division 7A — Why did the company "pay", "lend", or "forgive the debt"?

The reason a company did any of the following to, or for, a former shareholder, or former associate, can determine whether the ATO treats the event as a dividend1 (and therefore as assessable for income tax):

  • a payment from the company
  • a loan from the company
  • the forgiveness of a debt owed to the company.

The issue arises under Division 7A of the Income Tax Assessment Act 1936 (ITAA 36). Under the Division, if there is not a loan agreement (which complies with the Division) between the company and the former shareholder or former associate, then income tax is assessable on the event if the reason for the event is:

"... because the entity has been such a shareholder or associate at some time".

The ATO has released a Draft Taxation Determination explaining the Commissioner's view of the word "because", see Draft Taxation Determination TD 2008/D2.

Draft ATO view

Whether the event will be treated as a dividend depends on whether the ATO believes that one of the reasons behind the payment, loan or debt forgiveness was the former relationship.

An example (This example is a summary of an example the ATO has given.):


  • that a company employee, who is also a shareholder, owes $10,000 to the company under a loan that was only available to shareholders.
  • that the loan is not already treated as a dividend under Division 7A.
  • that when the employee retires from the company, she arranges for her debt to be forgiven. However, she first sells her shares, so that the debt forgiveness will not be a deemed dividend under Division 7A.

The Commissioner believes that a reasonable person would conclude that a real and substantial reason for the forgiveness of the debt was that she had been a shareholder of the company. Accordingly, under section 109C(1)(b) the forgiveness is deemed to be a dividend, and income tax is assessable.

More examples

The ATO has given 3 examples demonstrating how it thinks section 109C(1)(b) operates. You can access them all by clicking here to download a copy of TD 2008/D2.

The Commissioner's view

In the Commissioner's view, any payments, loans and forgiven debts to former shareholders or associates will be deemed dividends if the shareholder or associate's former relationship with the company was a real or substantial reason for the company making the payment or loan or forgiving the debt. This is so:

  • even if there may be other reasons for it; and
  • even if one of the other reasons is the main reason.

In the Commissioner's view, the question of whether the former relationship is a real and substantial reason for a payment, loan or debt forgiveness is to be determined objectively — would a reasonable person conclude that the former relationship is a reason for the payment, loan or debt forgiveness?


If TD 2008/D2 is finalised it will apply to payments, loans and forgiven debts before and after the finalisation date. This means that 'corrective action' may need to be considered by clients to avoid deemed dividends arising from past transactions that, as the determination explains, are caught in the Division 7A net.

What Division 7A says

Division 7A deems payments or loans made by a company to a shareholder of the company, or a shareholder's associate, or debts of a shareholder or associate which the company has forgiven, to be dividends2. This is so unless the payment, loan or forgiven debt is recorded in a written loan agreement that complies with the specific requirements set out in Division 7A.

If Division 7A operates to deem a payment, loan or forgiven debt to be a dividend then the amount of the payment, loan or debt must be included in the shareholder's, or associate's, assessable income and be subject to income tax (without being able to take into account any franking credits).

Division 7A also deems those payments, loans or forgiven debts to be dividends if they occur because the person receiving them was previously a shareholder or associate of a shareholder3. Accordingly, it doesn't matter that the person who has received the payment or loan or the benefit of the forgiven debt is no longer a shareholder or an associate of a shareholder — so long as their former relationship with the company as a shareholder or associate of a shareholder was the reason for the payment, loan or forgiven debt.

Comments to the ATO?

The Commissioner has invited comments by 28 March 2008. See Appendix 3 of TD 2008/D2 here for details about how to make comments.

More information

For more information in relation to this article or taxation generally, please contact Maddocks on 03 9288 0555 or 02 8223 4100 and ask for a member of our Tax & Revenue Team.


Lawyer in Profile

Paul Ellis
Paul Ellis
Special Counsel
+61 3 9258 3524

Qualifications: LLB, Deakin University, BA (Political Science), Monash University

Paul is a Special Counsel in Maddocks Government and Not-for-Profit Commercial team. He specialises in:

  • the establishment, governance, operations, regulation and administration of charities and other not-for-profit entities,
  • in commercial arrangements for the procurement or supply of goods and services, including technology services, and
  • in compliance and enforcement activities undertaken by government agencies.

Paul is Maddocks' main authority in relation to the Personal Property Securities Act 2009.

He has an in-depth understanding of the government sector, as his experience prior to Maddocks includes 13 years with the Victorian Department of Justice.

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