Section 109J of the Income Tax Assessment Act 1936 (ITAA 1936) states that a private company is not taken to have paid a dividend where:

1. The payment discharges an obligation (loan) to pay money to the entity; and

2.  The amount paid is not more than would have been required to discharge the obligation had the private company and the entity been dealing with each other at arm's length. If the above is note satisfied then the loan / payment maybe treated as a dividend with tax consequences.   

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