Division 7A is a provision in the Income Tax Assessment Act 1936 (Cth) that treats certain payments, loans, and forgiven debts from a private company to a shareholder or associate as deemed unfranked dividends, taxable in the recipient’s hands. Division 7A becomes relevant in M&A where the target company has provided loans or other benefits to the seller or related parties prior to sale, and where these have not been documented and serviced as compliant Division 7A loans.
Buyer due diligence will identify Division 7A exposures, and unresolved exposures typically result in indemnities, price adjustments, or pre-completion remediation as a condition precedent.