Income Tax Assessment Act 1936
Section 109T operates as if one entity (the first entity ) makes a payment to a second entity if the first entity guarantees a loan the second entity makes to a third entity (the target entity ) and, as a result of the guarantee, the first entity has a liability (other than a contingent liability) to make a payment to the second entity.
Example:109UA(2) [Reduction of payment]
A private company guarantees a loan that a bank makes to a shareholder in the private company and the shareholder defaults on the loan. As a result, the company has a presently existing liability to make a payment to the bank. Section 109T operates as if the private company had made a payment to the bank, so the company is treated by section 109V as making a payment to the shareholder (because the bank is interposed between company and shareholder).
The amount of the payment (as worked out under section 109V ) is to be reduced by any amount treated as a dividend as a result of the operation of section 109U in relation to the payment or loan made by the interposed entity to the target entity.109UA(3) [Where dividend deemed not to be paid]
A private company is not taken under this Division to pay a dividend because of the operation of subsection (1) in relation to a guarantee if the Commissioner is satisfied that:
(a) the target entity would suffer undue hardship if the private company were taken to pay a dividend to the entity because of the liability; and
(b) when the target entity entered into the loan, the entity had the capacity to pay the loan. 109UA(4) [Section 109T operation]
This section does not the limit the operation of section 109T .109UA(5) [ Application]
Subsection (1) does not apply if:
(a) as a result of the first entity's liability mentioned in that subsection, the target entity has a liability (other than a contingent liability) to make a payment to the first entity; and
(b) because of section 109N , the liability to make a payment to the first entity is not treated under this Division as giving rise to a dividend paid to the first entity.
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