New Taxpayer Alert and Draft Determination Aim to Close Loopholes
The Australian Taxation Office (ATO) has issued new guidance on Division 7A of the Income Tax Assessment Act 1936 (Cth), focusing on private company guarantee arrangements that may circumvent deemed dividend rules.
This includes Taxpayer Alert TA 2024/2 and Draft Taxation Determination TD 2024/D3, both of which clarify the ATO’s stance on interposed entities and guarantee structures that may trigger Division 7A consequences.
Key Issues Identified by the ATO
1. High-Risk Guarantee Structures (TA 2024/2)
The ATO is reviewing arrangements where:
- A private company (Company A) guarantees a loan from a financial institution to a related private company (Company B) that has little to no distributable surplus.
- Company B then on-lends or pays some or all of these funds to Company A’s shareholders (or their associates) without complying with Division 7A loan rules.
- The structure involves multiple steps designed to bypass Division 7A, effectively avoiding deemed dividend taxation.
The ATO considers such arrangements high-risk and warns taxpayers that they will be scrutinized.
2. Expansion of Section 109U (TD 2024/D3)
The draft determination clarifies that:
- The “first interposed entity” (i.e., the entity receiving the guarantee) does not have to be a private company—it can be any type of entity, including a public company.
- However, the final entity making the payment or loan to the target entity must be a private company for Division 7A to apply.
- The ATO will prioritize enforcement actions on artificial or contrived arrangements designed to exploit private companies with no distributable surplus.
3. Compliance & Enforcement Focus
The ATO recognizes that financial institutions often require related-entity guarantees for loans to private companies. However, only high-risk cases—where arrangements are clearly designed to bypass Division 7A obligations—will face enforcement action.
The final version of TD 2024/D3 will apply retrospectively, covering both past and future income years.
How Boa & Co. Can Help Ensure Compliance
Division 7A breaches can result in significant tax penalties. If your company has guarantee arrangements involving interposed entities, now is the time to review them.
At Boa & Co. Chartered Accountants, we provide:
- Expert Division 7A compliance reviews
- Risk assessment of private company guarantee structures
- Tax planning strategies to mitigate ATO scrutiny
Call us at 1300 952 286, email [email protected], or visit www.boanco.com.au for a consultation.