ATO flags security and guarantee arrangements that may trigger Div 7A
The ATO has released new guidance around the application of Div 7A for guarantees and securities provided by interposed entities for third party loans.
The ATO has intensified its focus on Division 7A compliance, issuing draft Taxation Determination TD 2024/D3 to clarify that private company guarantees on third-party loans—including those provided to banks—may trigger deemed dividend consequences.
This marks a significant shift, as previously, section 109U of the Income Tax Assessment Act 1936 (ITAA 1936) was primarily applied where one private company guaranteed a loan made by another related private company with distributable surplus.
Now, the ATO’s position is that even guarantees provided to unrelated third parties (such as banks) could result in a deemed dividend if the arrangement is part of a broader scheme involving indirect payments or loans to shareholders or their associates.
This was reinforced with the release of Taxpayer Alert TA 2024/2, which warns against contrived arrangements designed to circumvent Div 7A, including those that may fall under anti-avoidance provisions in Part IVA. Given this heightened scrutiny and expanded interpretation, businesses should reassess their related party financial agreements to manage potential tax risks.
ATO Focus: The ATO is increasing its focus on Division 7A compliance.
• Division 7A Trigger: Private company guarantees on third-party loans, including those provided to banks, may trigger deemed dividend consequences.
• ATO Advice: Businesses should reassess their related party financial agreements to manage potential tax risks.
TD 2024/D3
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 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.
If you have any queries in relation to this new guidance, please feel free to contact our office.
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