The ATO has issued a draft Taxation Determination TD 2024/D3, highlighting that arrangements where private companies provide security or a guarantee for third party loans to any other entity (including a public company bank) may result in a deemed dividend under Div 7A of the ITAA 1936.
Section 109U (under Div 7A) applies when a private company makes a payment to a shareholder or associate or a shareholder if:
- a private company guarantees a loan made by the first interposed entity
- another private company (which may be the first interposed entity or another entity) with minimal distributable surplus makes a loan or payment to a target entity
- a reasonable person would conclude that the guarantee was solely or mainly given as part of an arrangement involving a payment or loan to the target entity (reasonable person test), and
- the amount paid/loaned to the target entity exceeds the distributable surplus of the private company that made the loan/payment (insufficient distributable surplus condition).
Tax implications of the draft determination
In the draft determination, the ATO has taken the view that in an arrangement where a private company provides a loan guarantee to a bank which has no distributable surplus, s 109U may apply. Previous to this, the application of s 109U was only considered where one private company guaranteed a loan made by another related private company (with an available distributable surplus) to a shareholder or an associate.
Along with this draft determination, the ATO released Taxpayer Alert TA 2024/2, putting taxpayers on notice that may enter into arrangements where the guarantee and subsequent loan to the shareholder are provided “as part of the same contrived arrangement” for the purposes of avoiding Div 7A. Anti-avoidance provisions under Pt IVA may also be applied by the ATO to cancel any tax benefits arising from such arrangements.
If an arrangement of this nature in caught by s 109U, the payments/loans may be treated as deemed dividends. This means the amount could be included in the shareholder’s or associate’s assessable income, leading to additional tax liabilities
With this, the ATO has decided to devote considerable compliance resources to Div 7A issues, so this may be the right time for businesses to revisit their existing or prospective related party financial agreements and seek tax advice to mitigate any Div 7A risks.
Contact us
Before the end-of-year Div 7A compliance approaches, we can assist you with reviewing your related party financial arrangements.
The team at EMspire Advisory are trusted, qualified Chartered Accountants, tax agents, and small business accountants. We work closely with our clients to achieve the best possible outcomes. To find out more, please contact us!
Please note that this information is not specific and is general in nature and cannot be relied on as advice. Please contact us for advice specific to you and your circumstances.