What is a Division 7A dividend?

Division 7A dividend is a term used in the Australian tax system. It refers to an amount of money on which the Australian Taxation Office (ATO) can apply dividend tax under Division 7A of the Tax Act. Money from loans, advances, payments and other credits are treated as income to be assessed.

Division 7A exists to prevent private companies distributing tax-free profits to shareholders in any form other than dividends.

Where have you heard about Division 7A dividends?

If you hold shares in a private company that pays its tax in Australia it’s likely you will be familiar with Division 7A regulation.

What you need to know about Division 7A dividends.

Whenever a payment is made from a company to its shareholders or associates it must be declared as a Division 7A dividend. Examples include:

• Making payments to shareholders or associates, including transfers or use of property for less than market value
• Lending money to a shareholder or associate without a specific loan agreement, and not repaying it before end of year accounts are due
• Forgiving a debt owed by a shareholder or associate to the company

There are a few payments that are exempt from Division 7A dividends such as:

• Repayments of genuine debts owed to shareholders or associates
• Payments or loans to a company
• Payments assessable under another provision of the Tax Act
• Payments made to shareholders or associates in their capacity as employees or associates
• Liquidators’ distributions

Shareholders should keep private and company expenses separate, maintain records of all company transactions and, where necessary, create written agreements that clearly stipulate the conditions of any loans.