Division 7A captures situations where shareholders access company profits in the form of loans, payments, or forgiven debts. If certain steps are not taken, such as placing the ‘payment’ under a complying loan agreement, these amounts are treated as a deemed unfranked dividend and taxable at the taxpayer’s marginal tax rate.
Sweeping reforms to the operation of Division 7A were to take effect from 1 July 2020. However, these reforms have not been enacted. Given the extent of the proposed changes and the uncertainty created by COVID-19, we expect the timing of these reforms to be revised in the October federal budget.