If a private company provides a benefit to a shareholder or associate through another entity, the ATO may still treat it as a Division 7A deemed dividend. Section 109T prevents companies from avoiding Division 7A by routing payments, loans or debt forgiveness through interposed trusts, companies or individuals.
Key Takeaways
- Section 109T applies when a company uses one or more entities to pass benefits to shareholders or associates.
- The ATO identifies the “intended recipient” by examining the substance of the arrangement, not its form.
- Division 7A can apply even if the interposed entity receives the benefit first.
- Correct loan agreements and minimum yearly repayments are critical to avoid deemed dividends.
- Complex structures must show genuine commercial purpose to withstand ATO scrutiny.
How Section 109T Works: The Short Answer
Section 109T is designed to stop private companies from bypassing Division 7A by using another entity as a conduit. If a company first makes a payment or loan to an interposed entity, and that entity then provides a benefit to a shareholder or associate, the ATO can deem the final benefit to be a Division 7A dividend.
This rule applies whether the structure involves:
- trusts
- bucket companies
- corporate beneficiaries
- partnerships
- individuals
- multiple layers of entities
The ATO will look at the end result — who actually ends up with the benefit. If it is a shareholder or their associate, Section 109T can apply.
To better understand how Division 7A works at a broader level, you can review your structure with guidance from JC. Accountant’s Business Services early in the planning process.
Why the ATO Introduced Section 109T
Before Section 109T existed, companies could easily avoid Division 7A by passing money through another entity. For example:
- The company makes a loan to a trust.
- The trust distributes funds to a shareholder.
Under the old wording, Division 7A sometimes couldn’t apply because the benefit did not flow directly from the company to the individual.
Section 109T changed that.
It allows the ATO to “look through” layers of entities.
If the intended recipient of a payment or loan is a shareholder or associate, the ATO can deem that benefit as a dividend even if the company never dealt with them directly.
What the ATO Looks For Under Section 109T
To determine whether Section 109T applies, the ATO assesses the following:
1. Was there a benefit provided by a private company?
This includes:
- payments
- loans
- forgiven debts
These may occur under complex structures, but Division 7A can still apply.
2. Was the benefit passed on to an individual shareholder or associate?
This is the “end recipient” test.
3. Was the use of interposed entities intended to avoid Division 7A?
The ATO looks for:
- circular flows of funds
- loans that cannot be commercially justified
- deliberate structuring to bypass Division 7A
- timing patterns that align with dividend stripping
The law does not require explicit evidence of intent — the ATO can infer intent from circumstances.
4. Does the arrangement have a genuine commercial purpose?
If not, the ATO may treat it as a Division 7A avoidance scheme.
Common Structures That Trigger Section 109T
Section 109T may apply when any of the following sit between the company and the shareholder:
1. Discretionary trusts
Especially when:
- the trust makes loans to beneficiaries
- the trust receives a loan from a private company
- the trust is used to strip profits tax-free
2. Corporate beneficiaries / bucket companies
Often used to cap tax at 30 percent, but Division 7A issues arise when:
- UPEs sit unpaid
- the company does not receive actual cash
- funds are withdrawn by shareholders
A related topic is how certain UPEs interact with Division 7A, which we discuss further in our page on capital gains tax reporting when selling trust assets.
3. Partnerships and individuals
Sometimes used as steps in multi-layer schemes.
4. Multiple trusts (“multi-tier” trust arrangements)
High-risk according to recent ATO guidance.
How the ATO Determines the Deemed Dividend Amount
Under Section 109T:
- The ATO works backwards to trace the benefit from the shareholder to the company.
- The deemed dividend equals the smallest payment, loan or forgiveness along the chain.
- The amount cannot exceed the company’s distributable surplus.
Example:
- Company lends $400k to Trust A
- Trust A loans $250k to Individual B
The deemed dividend is $250k, not $400k.
Safe Harbour: When Section 109T Does Not Apply
Section 109T does not apply if all of the following are true:
- The interposed entity is not expected to pass on the benefit.
- The benefit ultimately provided is unrelated to the original payment.
- The arrangement is entirely commercial (for example, an arm’s length loan).
- The private company takes reasonable steps to ensure no shareholder receives the benefit.
However, in practice, the ATO rarely accepts this without documentation.
Documentation the ATO Looks For
To defend against Section 109T assessments, the following must be clear and consistent:
- Trust resolutions
- Minutes showing commercial reasoning
- Loan agreements with benchmark interest
- Bank statements showing genuine cash movements
- Evidence of minimum yearly repayments
- Correspondence showing commercial intent
- Corporate records showing beneficiary entitlements
A lack of paperwork is often treated as evidence of tax avoidance.
ATO Case Studies and Real-World Applications
ATO case studies reveal common themes:
1. Using a trust to funnel company profits to an individual
The company loans money to the trust, but the individual takes the cash.
2. Using a corporate beneficiary but never paying the UPE
Funds end up with shareholders instead.
3. Multi-entity structures designed for tax reduction
The ATO now closely examines multi-layered arrangements, especially where income is retained in companies but enjoyed by individuals.
4. “Replacement loans” used to avoid repayments
Often caught under anti-refinancing rules.
Practical Steps to Stay Compliant
To avoid triggering Section 109T, businesses should:
- Ensure all loans have Division 7A-compliant agreements
- Make minimum yearly repayments on time
- Avoid circular fund movements
- Document commercial purpose thoroughly
- Avoid using trusts as cash extraction vehicles
- Seek advice before restructuring
- Keep clear trustee resolutions
If your structure uses trusts, interposed companies or loan arrangements, consider a review through JC. Accountant’s Small Business Services to ensure compliance.
Final Thoughts and Next Steps
Section 109T is one of the ATO’s strongest tools for stopping the indirect flow of company profits to shareholders. As the ATO continues to increase scrutiny of complex structures, companies using trusts, bucket entities or multi-layer arrangements must ensure their documentation, loan agreements and cash movements can withstand review.
Professional guidance is essential if your structure involves shareholder loans, interposed entities or unpaid present entitlements.
Speak With a Division 7A Specialist
Have questions about how Section 109T affects your structure? Our Brisbane accountants can review your arrangements, identify risks and help keep you compliant.
