If the interposed entity that makes the loan to the target entity is a private company and the target entity defaults on the loan, the arrangement falls under both types of arrangement discussed in this fact sheet (compare Diagrams 1 and 4). If the private company guarantor is taken to pay a dividend to the target entity because the arrangement is as illustrated in Diagram 1, any payment it is taken to make due to the target entity defaulting on the loan is reduced by the amount of that dividend.
On 1 December 2004, Brewer Pty Ltd enters into an arrangement with Tate Pty Ltd in which Brewer Pty Ltd will guarantee a loan of $50,000 that Tate Pty Ltd makes to Todd that same day. Todd is a shareholder of Brewer Pty Ltd, which has a distributable surplus of $100,000. Tate Pty Ltd is an unrelated private company with a nil distributable surplus.
On 1 June 2005, Todd defaulted on the loan after repaying Tate Pty Ltd only $10,000.
This example is shown below.
Diagram 6. Brewer Pty Ltd guarantees a loan an interposed private company (Tate Pty Ltd) makes to Brewer's shareholder Todd. Todd defaults after repaying some of the loan. Brewer Pty Ltd is caught under both the arrangements illustrated in Diagrams 1 and 4. However, the dividend Brewer is taken to pay is the maximum (not the sum) of the two amounts due to each arrangement.
On 1 December 2004, Brewer Pty Ltd is taken to make a payment of $50,000 to Todd (see Diagram 1). On 30 June 2005, Brewer Pty Ltd is taken to pay a dividend of $50,000 to Todd, being the amount Tate Pty Ltd paid Todd less Tate Pty Ltd's distributable surplus (that is $50,000 - nil).
On 1 June 2005, Brewer Pty Ltd is taken to make a payment of $40,000 to Todd (that is the payment Brewer Pty Ltd is liable to pay Tate Pty Ltd under the guarantee - see Diagram 4). However, on 30 June 2005 this amount will be reduced to nil because of the $50,000 already treated as a dividend (see previous paragraph).