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_Farokh(Initiate)Initiate
27 Mar 2021

Hi,

A company has one family member as a shareholder and director. Another family member is a director only.

The company had a negative directors loan account balance on the balance sheet for the family member who is a director only.

The distributable surplus worked out using the formula from the ATO legal database was also a negative amount.

This was because the total liabilities were greater than the total assets and there were no other Div7A amounts or non-commercial loans (as per the formula) on the balance sheet.

My questions to the community are:

1. Do the Div7A rules apply to the director who is not a shareholder for deemed dividend purposes.

2. If yes, then as the distributable surplus was a negative amount, does that mean that there is NO DEEMED DIVIDEND to have been paid to the director and therefore not assessable income of the director.

3. Is the company able to write off the loan as a bad debt.

Thank You

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_thne(Devotee)Devotee
27 Mar 2021

If the director is an associate of the shareholder-director, then Div7A rules may apply to the director. Associate can include relative/partner/spouse/child, trustee of a trust of which the shareholder-director is a beneficiary, etc

Note that, for distributable surplus purposes, "present legal obligation" doesn't always equal 'total liabilities' in the company's books. Also, the act of debt forgiveness itself may give rise to a distributable surplus and hence deemed dividends, as the amount of the loan written off will be included in the distributable surplus formula as “Division 7A amounts�.

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Most helpful reply

_thne(Devotee)Devotee
27 Mar 2021

If the director is an associate of the shareholder-director, then Div7A rules may apply to the director. Associate can include relative/partner/spouse/child, trustee of a trust of which the shareholder-director is a beneficiary, etc

Note that, for distributable surplus purposes, "present legal obligation" doesn't always equal 'total liabilities' in the company's books. Also, the act of debt forgiveness itself may give rise to a distributable surplus and hence deemed dividends, as the amount of the loan written off will be included in the distributable surplus formula as “Division 7A amounts�.

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