What is Division 7A in family law?

Taxation obligations that are based on debits that a shareholder has with a private company, pursuant to Division 7, are counted as liabilities in a family law settlement.

Property settlement matters may become more complicated if one party has shareholder interests in a private company or multiple companies. The Family Court is required to assess an individual’s tax liability if they receive shareholder payments from a private company. This liability is often known as a Division 7A liability, named after Division 7A of the Income Tax Assessment Act. 

Division 7A of the Income Tax Assessment Act

Division 7A of the Income Tax Assessment Act considers some payments from private companies to a shareholder as a taxable dividend. These types of payments include: 

• Payments made by the company to the shareholder 
• Any amount that the company has lent to the shareholder
• Any amount of debts that a shareholder owes that have been forgiven by the company

Such payments will be subject to an individual’s personal marginal tax rate rather than the company’s tax rate. Hence, this tax liability will be considered as part of that individual’s liability. 

Division 7A in the Family Court

A Division 7A liability will most likely be considered in a property settlement matter when the Court ascertains the asset pool to be divided. For example, a Court may order that a private company pay money or transfer property to a shareholder or another person because of a marriage or relationship separation. Depending on the circumstances, the the payment received by the person may be treated either as an ordinary dividend or a deemed dividend. 

An ordinary dividend

An ordinary dividend arises when a private company makes a payment or transfers property to a person who is a shareholder of the private company. 

A deemed dividend

A deemed dividend arises when a private company makes a payment or transfers property to a person who is not a shareholder of the private company. 

Commercial loans which exclude the application of Division 7A

The Income Tax Assessment Act does allow shareholders to minimise their tax burden if they enter into a commercial loan with the private company. However, for the loan to be valid it must comply with requirements such as: 

• The loan must be made through a written agreement
• Interest must be charged at the minimum rate
• Minimum repayments rates are to be made annually

For a secured loan, the maximum term must be 25 years and for unsecured loans the maximum term must be 7 years. 

If a loan agreement does not satisfy these requirements, a deemed dividend may be declared for the whole loan amount. 

If you need any assistance regarding a prospective Division 7A liability please feel free to reach us via the contact form.