ATO Interpretative Decision

ATO ID 2004/514

Income Tax

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

Issue

If a dividend is taken to arise under Subdivision B of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) between a private company and a taxpayer, and the taxpayer is an interposed entity for the purposes of section 109T of the ITAA 1936, can subsection 109T(3) of the ITAA 1936 have any effect on the Subdivision B dividend?

Decision

No. If a dividend is taken to arise under Subdivision B of Division 7A of the ITAA 1936 between a private company and a taxpayer, and the taxpayer is an interposed entity for the purposes of section 109T of the ITAA 1936, subsection 109T(3) of the ITAA 1936 does not have any effect on the Subdivision B dividend.

Facts

On 30 April 2004, Company X makes a $100,000 loan to the Z Trust (the taxpayer) which is an associate of a shareholder of Company X. The loan is not an excluded loan under Subdivision D of Division 7A of the ITAA 1936 and is not repaid until 30 June 2007. Company X has distributable surplus of $200,000 at 30 June 2004. The taxpayer is taken to receive a deemed dividend of $100,000 on 30 June 2004 under subsection 109D(1) of the ITAA 1936.

On 31 May 2004, the taxpayer makes a $100,000 loan to Company Y which is a shareholder of Company X. The purpose of Company X in making the loan to the taxpayer is to enable the loan by the taxpayer to Company Y.

Reasons for Decision

Subsection 109D(1) of the ITAA 1936 provides that a private company is taken to pay a dividend to a shareholder or their associate at the end of the private company's year of income if:

•

the private company makes a loan to the shareholder or their associate during the year

•

the loan is not fully repaid by the end of the year, and

•

Subdivision D of Division 7A of the ITAA 1936 does not apply.

Section 109T of Subdivision E of Division 7A of the ITAA 1936 applies to certain interposed entity arrangements. Subsection 109T(1) of the ITAA 1936 provides:

This Division operates as if a private company makes a payment or loan to an entity (the target entity ) as described in section 109V or 109W if:

(a)

the private company makes a payment or loan to another entity (the first interposed entity) that is interposed between the private company and the target entity; and

(b)

a reasonable person would conclude (having regard to all the circumstances) that the private company made the payment or loan solely or mainly as part of an arrangement involving a payment or loan to the target entity; and

(c)

either:

(i)

the first interposed entity makes a payment or loan to the target entity; or

(ii)

another interposed entity between the private company and the target entity makes a payment or loan to the target entity.

The construction of subsection 109T(1) of the ITAA 1936 is such that it does not deem a dividend between the private company and target entity, rather it deems a transaction, being either a payment or loan, between the private company and target entity. The characteristics of the deemed transaction are set out in section 109V of the ITAA 1936 if the target entity receives a payment and under section 109W of the ITAA 1936 if the target entity receives a loan.

However section 109T of the ITAA 1936 does not cause a deemed transaction between a private company and target entity where the requirements of subsection 109T(3) of the ITAA 1936 are met. Subsection 109T(3) of the ITAA 1936 provides:

This Division does not operate as described in subsection (1) (and sections 109V and 109W) if the private company is taken under Subdivision B (as it applies apart from this Subdivision) to pay a dividend as a result of the payment or loan to the first interposed entity.

In the circumstances here the operation of Subdivision B of Division 7A of the ITAA 1936 does (as it applies apart from Subdivision E) result in a deemed dividend between Company X and the taxpayer. That is, the taxpayer is taken to receive a $100,000 dividend from Company X under subsection 109D(1) of the ITAA 1936. Therefore, subsection 109T(3) of the ITAA 1936 operates and subsection 109T(1) of the ITAA 1936 does not cause there to be a deemed loan between Company X and Company Y. Further, since subsection 109T(1) of the ITAA 1936 does not operate, neither does section 109W of the ITAA 1936.

Therefore subsection 109T(3) of the ITAA 1936 does not affect the deemed dividend that arises between company X and the taxpayer under subsection 109D(1) of the ITAA 1936.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   Subdivision B
   subsection 109D(1)
   Subdivision D
   Subdivision E
   section 109T
   subsection 109T(1)
   subsection 109T(3)
   section 109V
   section 109W

Keywords
Deemed dividends
Private company distributions

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  25 June 2004

ISSN: 1445-2782