Private ruling: Application of Division 7A rules
Date of advice: 15 July 2015
Published: July 2015
Ruling period: Year ended 1 July 2011
Date scheme commenced: 1 July 20XX

Ruling: Question and answer | Is a distinction drawn between a private company that is 'holding' company and one that is a 'trading' company in regard to the application of Division 7A of Part III of the Income tax Assessment Act 1936 (ITAA 1936)? | No.

Relevant facts and circumstances: The company owned a parcel of land which was transferred to the child of the directors. The land was gifted to the child as a successional transfer. The company was always a 'holding' company and had never traded nor earned any income. When preparing the income tax returns for the year in which the transfer of land was made, the accountant made the parties aware of the implications of Division 7A of the ITAA 1936. The company directors had not been made aware of the Division 7A implications by their accountant or anyone else prior to the transfer of the land being completed. On the advice of the accountant, a complying loan agreement was put in place between the child and the company in which the child paid interest to the company.

Relevant legislative provisions: Division 7A of Part III of the Income Tax Assessment Act 1936

Reasons for decision: Summary: Division 7A of Part III of the ITAA 1936 is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates). In particular, advances, loans and other payments or credits to shareholders (or their associates) are, unless they come within specified exclusions, treated as assessable dividends to the extent that the private company has a distributable surplus. Division 7A may apply to any payments or other benefits provided by private companies directly or indirectly to their shareholders or their associates, including the following transactions and events: • private use of company assets, • transfer of company assets, • gifts, • loans and other forms of credit, • writing off (forgiving) a debt, • guarantees, • payments or the loans by a trust where a company has unpaid present entitlements, • payments and loans through interposed entities. Under Division 7A, the assessable dividend is taken to be paid out of the private company's profits to the recipient as a shareholder in the private company. If the transaction involves a transfer of property, the amount of the dividend is the amount that would have been paid for the transfer by parties dealing at arm's length, less any consideration given by the shareholder or their associate for the transfer. Division 7A operates automatically and the Commissioner is not required to make a determination. However, a payment, transfer or loan that is potentially subject to Division 7A is not treated as a dividend where it is: • fully repaid or converted to a Division 7A complying loan by the company's lodgment day for the income year in which the payment, transfer or loan occurs, or • already treated as assessable income (or excluded from being assessable income) under another part of the income tax law. The Division 7A provisions apply to all private (Pty Limited) companies. There is no distinction drawn between a company that is established as a 'holding' company and another that is established as a 'trading' company as both entities have the same private company structure.