Income Tax Assessment Act 1936

PART III - LIABILITY TO TAXATION  

Division 7A - Distributions to entities connected with a private company  

Subdivision E - Payments and loans through interposed entities  

SECTION 109UA   CERTAIN LIABILITIES UNDER GUARANTEES TREATED AS PAYMENTS  

109UA(1)   [Operation]  

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:

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).

109UA(2)   [Reduction of payment]  

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.