Whilst Div 7A is most common amongst domestic private groups, there is also the risk of its application to larger corporate groups, including those with an international focus.
In its simplest form and subject to certain exclusions, Div 7A may apply to transactions such as loans, advances, payments, debts forgiven and the use of assets provided by a ‘private’ company to its shareholders or their associates (i.e. related parties). If Div 7A applies, amounts could be deemed as an unfranked dividend and assessable to the shareholder or their associate.
A key aspect to consider when managing Div 7A is the primary factor of whether a ‘private’ company is involved. We will use an example of an Australian subsidiary of a listed foreign company proposing to provide a loan to an overseas non-corporate associate (say a trust or partnership). Prior to making the loan, the subsidiary had undergone a restructure, resulting in the sale of a significant portion of it shares to privately held entities.
Have we considered whether the subsidiary could be a ‘private’ company for tax purposes?
In the event the subsidiary is considered ‘private’, you may remember, isn’t there a rule which says that dividend withholding tax doesn’t apply to Div 7A deemed dividends? However, it is important to consider the tax impact to a foreign shareholder or associate of receiving an unfranked dividend which is not subject to dividend withholding tax. This could be similar to a resident shareholder or associate receiving an unfranked dividend. Ouch!
When dealing with multinational corporate groups, especially those that have undergone a restructure, don’t forget to adequately consider Div 7A. Potential scenarios to think about Div 7A include:
- An overseas related private company making a loan to an associated Australian trust or partnership
- An Australian private company making a loan to an associated foreign trust or partnership.