Answer to Question #160458 in Economics for sandeep

Question

What is Division 7A of the Tax Act and what is it aimed to achieve? Discuss with reference to relevant cases and/or news article.

Answer 1

If a shareholder or associate of a shareholder in a private company is an employee of the same company, payments and other benefits received by the shareholder or associate may be subject to surcharge tax (FBT) provisions instead of Section 7A.

Payments

Payment will not be considered a dividend under Section 7A if it is made by a private company to a shareholder or associate of the shareholder if the payment is made to an individual in their capacity as an employee or associate of an employee. ...

This means that FBT can be applied for payments, including property transfers.

Old age contributions made by a private company to a shareholder or associate of a shareholder in connection with their work are not subject to Section 7A and are generally not subject to FBT.

Section 7A - Payments by Private Companies

Loans

In contrast to payments, Division 7A prefers FBT to loans made by a private company to a shareholder or its associate. This is true even if:

the loan is provided to a shareholder or his associate as an employee or associate of an employee, or

the loan is provided in connection with the employment of the employee.

However, any loans not covered by Section 7A can be considered “loan benefits” provided by the employer to employees and therefore the FBT can apply. An employer grants a loan if he gives the employee a loan without interest or with a low-interest rate. A low-interest rate is an interest rate that is below the FBT benchmark interest rate. This rate is published annually, usually in April.

Effective April 1, 2007, a loan placed in division 7A under the terms of the loan will not be considered a “credit benefit” for FBT purposes, even if the accrued interest is less than the FBT base interest rate.

Section 7A - Loans from Private Companies

Debts are forgiven

Generally, debt forgiveness by a private company in respect of debt owed to a shareholder or associate of the shareholder is treated as a dividend under Section 7A, even if:

the shareholder or its associate was indebted as an employee or an associate of the employee, or

forgiveness occurs in relation to the hiring of an employee.

To the extent that Section 7A does not apply, FBT may apply for (for example) “debt relief benefits” provided by an employer to employees. The employer provides additional debt relief if he forgives or forgives the employee's debt (other than a really bad debt).

Double taxation can be avoided as forgiven debts treated as dividends paid to the shareholder or its associates are excluded from the definition of fringe benefits.