Loans made by a company to a shareholder, or associate of a shareholder, will be deemed to have received a dividend from the company. Likewise, if a company forgives a debt owed by a shareholder or associate it will also be deemed that the shareholder receives a dividend equal to the amount forgiven. This is usually referred to as a Division 7A deemed dividend. The exception is where the statutory compliance has been observed and acted upon. There are a variety of scenarios that will give rise to a deemed dividend and requires careful care and attention to unravel any potential risk.

A deemed dividend is ordinarily taken to crystallise at the end of the tax year in which the loan is made or the debt is forgiven although there is some time beyond that date to take action and ensure that the deemed dividend does not become payable in the hands of the shareholder. Even in cases where significant time is past it is possible to make a specific application to the Commissioner to have the loan treated as a genuine loan and not as a deemed dividend. The Commissioner may even allow the dividend to be franked, provided of course, that the company has sufficient franking credits although this requires an application since it does not occur as a matter of course.