Trust Distribution, Division 7A and the Small Business CGT Concession
Rivergum Trading Pty Ltd is a small business (aggregated turnover $4.2 million) wholly owned by Anna and Ben, who are Australian residents. In the 2024-25 year the company made a $600,000 profit and resolved to distribute it as a dividend to Anna. Separately, the company lent Ben $250,000 on 30 June 2025, repayable on demand, with no interest and no written loan agreement. The company also sold a business asset in 2024-25, generating a capital gain of $800,000; the asset had been held for 6 years and was used in the active conduct of the business. Anna and Ben want to know the tax consequences and whether the small business CGT concessions can reduce the gain. The company is not a base rate entity for the year.
1. Analyse the Division 7A consequences of the $250,000 loan to Ben and the options available before the company's lodgment day.
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Is it a Division 7A loan? Yes. A loan from a private company to a shareholder (or associate) is a deemed dividend unless it fits an exclusion. Ben is a shareholder, the loan is $250,000, it is interest-free, has no written agreement, and has no complying loan terms. None of the exclusions apply (it is not a loan to another company, not in the ordinary course of business, and not a fringe benefit).
Consequence. The $250,000 is treated as a deemed dividend to Ben in 2024-25, included in his assessable income and franked to the extent of the company's franking account. The company must include it in its distribution statement.
Options before lodgment day. The company can avoid the deemed dividend by:
- Repaying the loan in full before the earlier of the lodgment day and the due date for lodgment.
- Converting it to a complying Division 7A loan - a written agreement, minimum interest rate (the benchmark rate for the year), and principal and interest repayments over the maximum term (7 years unsecured, 25 years if secured by a registered mortgage over real property).
- Declaring a dividend to the extent of the loan, which converts it into a franked dividend.
Practical points. The loan was made on 30 June 2025, so it is a 2024-25 loan and the lodgment day for the 2024-25 return is the deadline. A written agreement must be in place by that date; a later agreement does not cure the deemed dividend. The minimum yearly repayment must also be made. The company should also consider the interaction with the $600,000 dividend already resolved - the total distribution to Anna and Ben affects franking and personal marginal rates. Ben and Anna should be advised to document the loan immediately.
2. Assess whether the small business CGT concessions can reduce the $800,000 capital gain, and identify the tests that must be satisfied.
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Basic conditions. The company must satisfy:
- Small business entity - aggregated turnover of $4.2 million is under the $2 million threshold? No - the small business entity turnover threshold is $2 million, so at $4.2 million the company does not satisfy the small business entity test. However, the company may still access the concessions through the maximum net asset value test (net assets of the company and related entities not exceeding $6 million, excluding certain assets). The facts do not give net asset values, so this must be checked. This is the critical issue: turnover alone does not disqualify.
- CGT event - yes, sale of a business asset.
- Active asset test - the asset was used in the active conduct of the business for at least half of the ownership period (or 7.5 years if held longer). Held 6 years and used in the business throughout - satisfied.
Concessions available.
- 15-year exemption - only if the individual is 55+ and retiring, or permanently incapacitated; not applicable to a company asset sale in this form.
- 50% active asset reduction - reduces the gain by 50%, so $800,000 becomes $400,000.
- Retirement exemption - up to a lifetime cap (indexed; approximately $500,000 per individual for the relevant year) for each individual, if the proceeds are used for retirement. For a company, the exemption is limited to the extent the gain is distributed to shareholders.
- Small business roll-over - deferral if a replacement asset is acquired.
Order of application. Apply the 50% reduction first, then the retirement exemption or roll-over. The maximum net asset value test must be confirmed before any of this is available. If the company's net assets (plus related entities) exceed $6 million, no concession applies and the full $800,000 is a capital gain, with the company's tax rate applying. The company should also consider whether the gain can be streamed to Anna and Ben.