The Australian Taxation Office (ATO) issued an advisory regarding the Division 7A provisions on Monday, 24 June 2024, providing clarification on when the Commissioner of Taxation may disregard the operation of Division 7A or allow a deemed dividend to be franked.

The discretion may only be granted if an honest mistake or inadvertent omission has resulted in a breach of Division 7A, and the circumstances support the exercise of the discretion. The discretion can’t be exercised if one does not have sufficient supporting evidence.

What is Division 7A? 

Division 7A can apply to loans, payments, or other benefits when an associate or shareholder accesses money from their private company. When not managed correctly, this can result in the transfer of funds being treated as an unfranked dividend and larger than expected tax bills.

To prevent unexpected tax consequences, one must ensure all payments and unrepaid loans are placed under a compliant Division 7A loan agreement. This arrangement must be established before the company’s tax return filing deadline.

How can an exercise of the Commissioner’s discretion be requested?

Taxpayers must apply to the Commissioner to exercise his discretion to disregard the deemed dividend or to allow the private company to choose to frank the dividend. The application would normally be in writing and include all the information necessary for the Commissioner to make a decision. There is no prescribed or standard application form.

Any request for an exercise of the Commissioner’s discretion should include sufficient information to demonstrate to the Commissioner that the failure to comply with one or more of the provisions of Division 7A was the result of an honest mistake or inadvertent omission.

Once a Division 7A breach has been identified, the decision making process to determine if the discretion can be exercised may commence.

The decision of whether or not to exercise the Commissioner’s discretion is a two-step process:

Step 1: Determine whether the relevant breach of Division 7A resulted from an honest mistake or inadvertent omission. If this step has a satisfactory answer, taxpayers can proceed to step 2.

Step 2:  Determine whether the Commissioner should exercise his discretion to disregard a deemed dividend, or allow that dividend to be franked.

Generally a decision by the Commissioner to disregard a deemed dividend will be made on the condition that specified corrective action is undertaken within a specified time.

In this fact sheet, a reference to a shareholder or their associate is also a reference to:

• An entity that has been a shareholder, or
• An entity that has been an associate of a shareholder.