If the target entity makes a repayment on a loan made to it by an interposed entity (the lender), the amount the trustee is taken to have lent the target entity (called the 'notional loan') is reduced by the following amount:
Repayment made by target
entity to actual lender
Amount of notional loan
Amount actually lent to target entity
This is the formula for calculating the reduction of the deemed or notional loan where the target entity repays some of the loan the interposed entity made to the target entity.
On 1 June 2010 Samuel Trust makes a loan of $10,000 to Sam Pty Ltd under an arrangement in which Sam Pty Ltd will lend the amount to Samantha, a shareholder of Samuel Pty Ltd.
On 15 July 2011 Sam Pty Ltd lends Samantha $15,000.
For the year ended 30 June 2012 Samuel Pty Ltd has a distributable surplus of $50,000 and Sam Pty Ltd has a nil distributable surplus. Samuel Pty Ltd has a present entitlement to $25,000 from the net income of Samuel Trust, which has not been paid. Before the end of the income year Samantha repays $3,000 to Sam Pty Ltd.
In this example, Sam Pty Ltd is the interposed entity and Samantha is the target entity. Samuel Trust is taken to make a notional or deemed loan to Samantha of $10,000 as under the arrangement this was the amount lent to Samantha by Sam Pty Ltd. An additional amount of $5,000 was lent to Samantha by Sam Pty Ltd. The amount Samuel Trust is taken to have loaned Samantha is reduced by a proportion of the repayment Samantha made to Sam Pty Ltd. The amount of the reduction is:
$3,000 x $10,000 divided by $15,000
Therefore, the amount Samuel Trust is taken to have loaned Samantha is $8,000 (that is, $10,000 - $2,000).
The amount that is included in Samantha's assessable income, as if it were a dividend, is $8,000.
This example is shown below.
The loan Samuel Trust is taken to have made to Samantha is reduced by her repayment of the loan from Sam Pty Ltd.