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ATO Interpretative Decision

ATO ID 2010/206

Income Tax

Deemed dividends: written loan agreement - no repayments before the private company's lodgment day for the income year in which the loan is made
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is a private company taken under section 109D or section 109E of Division 7A of Part III (Division 7A) of the Income Tax Assessment Act 1936 (ITAA 1936) to pay a dividend in the income year in which a loan to a shareholder was made where:

•
the criteria in section 109N of the ITAA 1936 in relation to the loan concerning written agreement, minimum interest rate and maximum term are satisfied, but
•
the taxpayer does not make any repayments in respect of the loan before the private company's lodgment day for the income year in which the loan is made?

Decision

No. Where the criteria in section 109N of the ITAA 1936 are met, neither section 109D nor section 109E of the ITAA 1936 operate to treat an amount as a dividend for the income year in which the loan was made, even if the taxpayer makes no repayments in respect of the loan before the private company's lodgment day for that income year.

Facts

During the 2009-10 income year, a private company made an unsecured loan to the taxpayer, an individual, and the company's sole shareholder. As at the private company's lodgment day for the 2009-10 income year, no repayments had been made. The private company did not make any other loans to the taxpayer during the 2009-10 income year.

The loan was made under a written agreement, with a maximum term of 7 years and with a minimum rate of interest payable equal to the benchmark interest rate for the year.

The loan from the private company to the taxpayer satisfies the requirements of section 109N of the ITAA 1936.

Reasons for Decision

A private company is taken to pay a dividend under subsection 109D(1) of the ITAA 1936 at the end of its income year if:

•
the private company makes a loan to a shareholder during the current year (in this case, the 2009-10 year),
•
the loan is not fully repaid before the private company's lodgment day for that year, and
•
Subdivision D does not prevent the loan from being treated as a dividend.

Subdivision D of Division 7A of the ITAA 1936 contains a number of exclusions to the application of subsection 109D(1) of the ITAA 1936. Section 109N of Subdivision D prevents a private company from being taken to pay a dividend where:

•
the loan is made under a written agreement and the rate of interest payable on the loan for the income year after the year in which the loan is made, equals or exceeds the benchmark interest rate for the year, and
•
the term of the loan does not exceed the maximum term, which is seven years in the case of unsecured loans (refer to subsections 109N(1) and 109N(3) of the ITAA 1936).

Neither section 109N nor section 109E of the ITAA 1936 requires any repayment to be made before the private company's lodgment day for the year in which the loan is made.

Where the required minimum yearly repayment is not made for a subsequent year and the loan meets the definition of an 'amalgamated loan', section 109E of the ITAA 1936 may operate to treat the shortfall in the minimum yearly repayment as a dividend.

(Note: ATO ID 2010/82 explains that a repayment made before the private company's lodgment day for the year in which the loan is made, is taken into account in determining whether the required minimum yearly repayment is made for the income year immediately following.)

However, where the criteria in section 109N of the ITAA 1936 are met, neither section 109D nor section 109E of the ITAA 1936 causes any amount to be treated as a deemed dividend for the income year in which the loan is made. This is regardless of whether or not the taxpayer makes any repayments to the private company in respect of the loan before the private company's lodgment day for that income year.

Date of decision:  2 November 2010

Year of income:  Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1936
   Division 7A
   section 109D
   subsection 109D(1)
   section 109N
   subsection 109N(1)
   subsection 109N(3)
   section 109E

Related ATO Interpretative Decisions
ATO ID 2003/97

ATO Interpretative Decisions overturned by this decision
ATO ID 2003/95

Keywords
Companies
Shareholder loans
Private company distributions

Siebel/TDMS Reference Number:  1-2EU1PDM

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  12 November 2010

ISSN: 1445-2782

history
  Date: Version:
You are here 2 November 2010 Original statement
  8 August 2014 Updated statement

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