Deemed dividends where a company makes payments or loans, or forgives a debt to a shareholder or their associate, may be reduced following a decision of the Full Federal Court and the issue of a replacement Draft Tax Determination about when income tax becomes a present legal obligation.
The infamous Division 7A of the 36 Tax Act can deem a dividend (usually unfranked) to be paid where a company pays money, loans money, forgives a debt or provides the use of an asset to a shareholder or associate. The amount of the deemed dividend is limited to the “distributable surplus” which is calculated in a similar but slightly different formula to the retained earnings of the company.
The previous Tax Office position was that income tax did not become a liability for the purposes of calculating the distributable surplus until an assessment had issued.
Following the Court decision in 2010, the Tax Office now says the tax liability can be taken into account where:
+ Some or all of an instalment is unpaid at 30 June; and
+ A full self-assessment taxpayer has an amount due and payable (less any credits for instalments payable) even though the amount may not be due for a number of months after the end of the year.
Careful calculation of the distributable surplus may reduce the deemed dividend amount for taxpayers who have not put in place the appropriate loan documents.
TD 2012/D1, s 109Y (2) of 36 Tax Act, FCT v H (2010) FCAFC 128, WTB 2012/46
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