ATO Interpretative Decision

ATO ID 2005/298

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Where in an income year, a trustee makes loans to different shareholders (or associates) of a private company beneficiary with unpaid present entitlement, and a loan equal to the amount of the unpaid present entitlement is repaid or put on a commercial footing by the 'lodgement day', can section 109XB of Subdivision EA of Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) give rise to an assessable amount in respect of loans not repaid or put on a commercial footing by the 'lodgement day'?

Decision

Yes. Where in an income year, a trustee makes loans to different shareholders (or associates) of a private company beneficiary with unpaid present entitlement, and a loan equal to the amount of the unpaid present entitlement is repaid or put on a commercial footing by the 'lodgement day', the loans not repaid or put on a commercial footing by the 'lodgement day' may give rise to an assessable amount under section 109XB of the ITAA 1936.

Facts

For the income year, a private company is a beneficiary of a trust which has unpaid present entitlement to net income of $100,000 as at the earlier of the due date for lodgement and date of lodgement of the trust's income tax return for that income year.

During the income year, the trustee made five $100,000 loans to different shareholders of the private company. One of the five loans was put on a commercial footing by the 'lodgement day'. The remaining loans are not excluded loans because of Subdivision D of Division 7A of Part III of the ITAA 1936 or fully repaid by the 'lodgement day'.

There is no reduction under subsection 109XA(4) of the ITAA 1936 in respect of any of the loans for the purposes of applying section 109XB of the ITAA 1936.

Reasons for Decision

Subdivision EA of Division 7A of Part III of the ITAA 1936 came into effect from 12 December 2002 and replaced section 109UB of the ITAA 1936.

Broadly speaking, Subdivision EA of the ITAA 1936 deems certain payments, loans or forgiven debts by a trustee of a trust estate to a shareholder (or associate) of a private company to be included in the shareholder's (or associate's) assessable income as if they were a dividend where the private company is presently entitled to an amount from the net income of the trust estate and that amount has not been fully paid out by the 'lodgement day'.

The 'lodgement day' is the earlier of the due date for lodgement and date of lodgement of the trust's tax return for the income year in which the payment, loan or debt forgiveness occurs.

Subsection 109XA(2) of the ITAA 1936 is the provision which applies to trustee loans. It causes section 109XB of the ITAA 1936 to apply where:

a trustee makes a loan (the 'actual transaction') to a shareholder or an associate of a shareholder of a private company (except a shareholder or associate that is a company); and

(i)

The company is presently entitled to an amount from the net income of the trust estate at the time the loan takes place and the amount has not been paid to the company before the 'lodgement day'; or

(ii)

The company becomes presently entitled to an amount from the net income of the trust estate after the loan takes place but before the 'lodgement day' and the whole of the amount has not been paid to the company before the 'lodgement day'.

The construction of subsection 109XA(2) of the ITAA 1936 means it is triggered in respect of each discrete loan. Further, the provision is not concerned with whether other loans have been made by the trustee in the income year or whether those loans have been repaid or put on a commercial footing by the 'lodgement day'.

A loan is put on a commercial footing if it is put under a written agreement satisfying the minimum interest and maximum term criteria set out in section 109N of Subdivision D of Division 7A of Part III of the ITAA 1936.

Section 109XB of the ITAA 1936 provides as follows:

(1)

An amount is included, as if it were a dividend, in the assessable income of the shareholder or associate referred to in subsection 109XA(1), (2) or (3) if:

(a)

had the 'actual transaction' been done by a private company (the notional company); and

(b)

had the shareholder or associate been a shareholder of the notional company at the time the actual transaction took place;

an amount (the Division 7A amount) would have been included in the shareholder's or associate's assessable income because of a provision of this Division outside this Subdivision.

(2)

Subject to section 109Y, the amount that is included under subsection (1) is the Division 7A amount.

Section 109XB of the ITAA 1936 also applies separately to each loan (being the 'actual transaction') and is not concerned with other loans that have been repaid or put on a commercial footing by the 'lodgement day'.

Section 109D of the ITAA 1936 treats certain private company loans as dividends. Subsection 109D(1) of the ITAA 1936 reads:

A private company is taken to pay a dividend to an entity at the end of one of the private company's years of income (the current year) if:

(a)

the private company makes a loan to the entity during the current year; and

(b)

the loan is not fully repaid before the lodgement day for the current year; and

(c)

Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and

(d)

..........................

Therefore, in the circumstances here, it is only the loan that has been put on a commercial footing by the 'lodgement day' that will not give rise to an assessable amount under section 109XB of the ITAA 1936. In respect of the other loans, in each case the amount would have been treated as a dividend under section 109D of the ITAA 1936 if made by a private company and therefore a section 109XB assessable amount will arise subject to the operation of subsection 109XB(2) of the ITAA 1936 in conjunction with section 109Y of the ITAA 1936.

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1936
   Division 7A
   Subdivision D
   Subdivision EA
   section 109D
   paragraph 109D(1)(b)
   paragraph 109D(1)(c)
   section 109N
   section 109Y
   section 109XA
   subsection 109XA(2)
   subsection 109XA(4)
   section 109XB
   subsection 109XB(2)

Related ATO Interpretative Decisions
ATO ID 2005/297
ATO ID 2005/299

Keywords
Borrowings & loans
Deemed dividends
Trusts
Private companies

Siebel/TDMS Reference Number:  4765443; 1-5CU8O1M;1-CWK2FQA

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  28 October 2005
Date reviewed:  31 October 2017

ISSN: 1445-2782