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Taxation of dividend income

Devotee

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Replies 3

 

Hi, community please assist me.

 

This is merely a hypothetical scenario and I am only asking this question for my understanding of the tax principles. 

 

Also, I did ask this question before but I felt that I did not question structure the question properly. 

 

So I have now presented it in a slightly different way.

 

Previous q: 

https://community.ato.gov.au/t5/Tax-professionals/Trust-Distribution-to-a-Company/m-p/135522#M3626 

 

 

Scenario

 

Assume that there is a Div 7A loan ( previously a 7-year UPE loan resulting from an unpaid distribution) between a trust and its beneficiary company.

 

In the 19/20 year, the trust is unable to meet the minimum repayment and therefore the beneficiary company declares a dividend (not in cash) to the trust.

 

The " Trustee company" is a shareholder of the beneficiary company.

 

The shares are held for the benefit of the trust by the trustee company.

 

Question 

 

a) Theoretically is it possible for such an arrangement to exist? ( I will not count this as tax advice, merely asking for a thought)

 

b) if possible, then the dividend declared would be an income of the trust and the trust will have to distribute the amount back to the beneficiary company.

 

That would cause the loan balance ( 'unpaid distribution payable') to increase and the beneficiary will have to declare a new dividend based on the updated loan balance. All these happening within the same year.

 

Therefore in such a scenario, the process will be cyclical and the amounts would keep going back and forth between the beneficiary and the trust.

 

Is it possible to " Not to recalculate minimum repayment ' for the second time and not declare a dividend for the updated loan balance?. The intention is to stop repeating the process for the year.

 

Thank you.

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Taxicorn Registered Tax Practitioner

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a) Theoretically is it possible for such an arrangement to exist? ( I will not count this as tax advice, merely asking for a thought)

 

Yes  -  I do this sort of stuff.

 

b) if possible, then the dividend declared would be an income of the trust and the trust will have to distribute the amount back to the beneficiary company.

 

Yes

 

That would cause the loan balance ( 'unpaid distribution payable') to increase and the beneficiary will have to declare a new dividend based on the updated loan balance. All these happening within the same year.

 

No  -  you have a year to add the new Div 7A loan amount arising from the new distribution.

 

Therefore in such a scenario, the process will be cyclical and the amounts would keep going back and forth between the beneficiary and the trust.

 

Not in the same year.

 

Is it possible to " Not to recalculate minimum repayment ' for the second time and not declare a dividend for the updated loan balance?. The intention is to stop repeating the process for the year.

 

No  -  the result will be an unfranked deemed dividend = amount of minimum loan payment not paid.

You can do the numbers and see which is better.

 

Failure to make a minimum yearly repayment in respect of an amalgamated loan

From the 2007 income year, a shortfall in a minimum yearly repayment on an amalgamated loan may be deemed to be a dividend (subject to the private company's distributable surplus) if:

  • a private company made an amalgamated loan to a shareholder or their associate in an earlier year of income
  • the amalgamated loan is not repaid at the end of the current year
  • the amount paid to the private company during the current year in respect of the loan is less than the minimum yearly repayment for the current year
  • the Commissioner does not exercise his discretion not to treat the amount as a dividend.

If a shareholder or their associate makes a repayment for a constituent loan in an income year after the year in which the constituent loan was made, the repayment is taken to be a repayment in respect of the amalgamated loan.

From:

https://www.ato.gov.au/business/private-company-benefits---division-7a-dividends/in-detail/division-...

 

 

3 REPLIES 3

Most helpful response

ATO Certified Response

Taxicorn Registered Tax Practitioner

Replies 2

a) Theoretically is it possible for such an arrangement to exist? ( I will not count this as tax advice, merely asking for a thought)

 

Yes  -  I do this sort of stuff.

 

b) if possible, then the dividend declared would be an income of the trust and the trust will have to distribute the amount back to the beneficiary company.

 

Yes

 

That would cause the loan balance ( 'unpaid distribution payable') to increase and the beneficiary will have to declare a new dividend based on the updated loan balance. All these happening within the same year.

 

No  -  you have a year to add the new Div 7A loan amount arising from the new distribution.

 

Therefore in such a scenario, the process will be cyclical and the amounts would keep going back and forth between the beneficiary and the trust.

 

Not in the same year.

 

Is it possible to " Not to recalculate minimum repayment ' for the second time and not declare a dividend for the updated loan balance?. The intention is to stop repeating the process for the year.

 

No  -  the result will be an unfranked deemed dividend = amount of minimum loan payment not paid.

You can do the numbers and see which is better.

 

Failure to make a minimum yearly repayment in respect of an amalgamated loan

From the 2007 income year, a shortfall in a minimum yearly repayment on an amalgamated loan may be deemed to be a dividend (subject to the private company's distributable surplus) if:

  • a private company made an amalgamated loan to a shareholder or their associate in an earlier year of income
  • the amalgamated loan is not repaid at the end of the current year
  • the amount paid to the private company during the current year in respect of the loan is less than the minimum yearly repayment for the current year
  • the Commissioner does not exercise his discretion not to treat the amount as a dividend.

If a shareholder or their associate makes a repayment for a constituent loan in an income year after the year in which the constituent loan was made, the repayment is taken to be a repayment in respect of the amalgamated loan.

From:

https://www.ato.gov.au/business/private-company-benefits---division-7a-dividends/in-detail/division-...

 

 

Devotee

Replies 1

Hi @Bruce4Tax  Thanks a lot .

 

Now it is clear to me as to where I went wrong. I failed to note that the during the year distributions ( including the dividend ) should be considered as separate Div 7A loan from the previous year's one.

Taxicorn Registered Tax Practitioner

Replies 0

Timeline goes like this:

 

30/06/2019  Trust distrbn to company

 

30/06/2020  UPE not paid  ->  Div 7A loan

 

28/06/2021  Dividend to trust to cover Div 7A min payment 

 

30/06/2021  Trust distribn to company  -  starts it all again.

 

Until new Div 7A system  -  not law yet.

https://www.williambuck.com/service/%services%/private-business-tax-reform-resource-centre/division-...