Deemed Dividends:

A loan or advance made by a private company to a shareholder (or to an associate of a shareholder) are automatically deemed to be dividends, unless the loan or advance made falls with specific and specified exclusions. A deemed dividend may arise in the situation where a private company pays or credits an amount to a past or present shareholder, director, or an associate of a past or present shareholder or director. Examples of payments that may be categorised as a deemed dividends are:

• For remuneration for services rendered;
• A retirement allowance;
• A termination allowance; and
• A gratuity or compensation payment.

Where the payment is made from a private company to the employee (who is the concessional stakeholder) and the payment is considered to be excessive by the ATO, pursuant to section 109 of the Income Tax Assessment Act 1936 (Cth), the ATO will deem the excessive remuneration to be divided under these provisions.

For taxation purposed, a ‘dividend’ is defined to include any distribution made by a company to its shareholders whether the distribution is made in money or the distribution is made by other property (which can include shares in that company or another company). The term dividend can include any distribution by way of redemption or cancellation of a redeemable preference share.

Under Division 7A of the Income Tax Assessment Act 1936, amounts paid, lent or forgiven by a private company to certain associated entities (for example employees or shareholders) are treated as dividends, unless the payments fall within specified exclusions. A Division 7A or ‘Div 7A’ deemed dividend is generally taken to be paid at the end of the income years of the company in which the amount was paid.

Due to the complexity of the taxation laws surrounding deemed dividends and Div 7A dividends, it is important you understand the effects of making payments to associated entities and whether the payments will be considered to be a deemed dividend.

Our team of experienced tax lawyers can examine your circumstances and provide you with tax advice on how the payments may be treated by the ATO and what would be the most tax effective way for you to make payments to associated parties. If you wish to book a consultation, you can contact our firm by telephone on (02) 9233 4048 or by email to info@navado.com.au.

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