The dreaded distributable surplus calculation: Is your business Division 7A compliant?

What is Division 7A?

Division 7A is an integrity measure that was designed to prevent companies from making tax-free distributions to shareholders or their associates.

What do you need to know?

After a quick glance at the balance sheet, you might prematurely assume you don’t have any distributable surplus and therefore there is no deemed dividend.

However, the Commissioner of Taxation has the power to adopt or correct the values of assets of an entity included in the calculation of a distributable surplus. This includes adopting market values for assets reflected on and off the balance sheet. Generally, this may occur when there has been a deliberate, significant understatement of the value of assets, with a view to avoiding the operation of Division 7A.  Examples of where the market value may be substituted by the Commissioner include:

• where shareholders/directors have been able to increase their ability to borrow from the equity in the company due to internally generated goodwill; or,
• where shareholders/directors have been able to leverage off a property owned by the company that has had significant capital growth.

It is therefore important to always consider the market value of the assets on your balance sheet when determining whether there is a distributable surplus and potential exposure to a Division 7A deemed dividend.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to your circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.