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

Can section 109XB of the Income Tax Assessment Act 1936 (ITAA 1936) deem loans made by a trustee to different shareholders (or associates) of a beneficiary private company with unpaid present entitlements (UPEs) as an assessable amount where any loans equal to the amount of the UPE are neither repaid nor converted into a complying loan agreement by the 'lodgment day'?

Decision

Yes. Where a trustee makes loans to different shareholders (or associates) of a beneficiary private company that has a UPE, any loans neither repaid nor converted into a complying loan agreement by the 'lodgment day' may give rise to an assessable amount under section 109XB of the ITAA 1936.

Facts

A private company is a beneficiary of a trust which has a UPE to net income of $100,000 as at the 'lodgment day'.

During the income year, the trustee made five $100,000 loans to different shareholders of the company. One of the loans was converted into a complying loan agreement by the 'lodgment day'. The remaining loans ( other loans ) are not excluded loans captured under Subdivision D of Division 7A to Part III of the ITAA 1936 and were not fully repaid by the 'lodgment 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 the ITAA 1936 deems certain payments, loans or debt forgiveness made by a trustee of a trust estate to a shareholder (or an associate of the shareholder) of a private company as a dividend where the private company:

(a)

is presently entitled to an amount of the net income of the trust estate; and

(b)

that amount has not fully paid their present entitlement by the 'lodgment day'.

All references to the 'lodgment day' mean the earlier of:

(a)

the due date for lodgment; and

(b)

the due date for lodgment of the trust's tax return for the income year in which the payment, loan or debt forgiveness occurs.

With respect to loans made by trustees to private company beneficiaries, subsection 109XA(2) of the ITAA 1936 provides that:

(2)

Section 109XB applies if:

(a)

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

(b)

either:

(i)

the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place; or

(ii)

the company becomes presently entitled to an amount from the net income of the trust estate after the actual transaction takes place, but before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place, and the whole of the amount has not been paid to the company before the earlier of those dates.

As subsection 109XA(2) of the ITAA 1936 refers to 'a loan', it is triggered in respect of each separate loan. Further, this provision operates despite other loans being made by the trustee in the income year even where those loans have been repaid or converted into a complying loan under section 109N of the ITAA 1936 by the 'lodgment day'.

Section 109XB of the ITAA 1936 provides that:

(1)

[Amount included as if dividend] An amount is included, as if it were a dividend paid by the company at the end of the year of income of the company in which the actual transaction took place, 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)

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

Similarly to the application of subsection 109XA(2) of the ITAA 1936, section 109XB of the ITAA 1936 applies to each 'actual transaction'. Therefore, it will operate with respect to each loan.

Section 109D of the ITAA 1936 provides that:

(1)

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 lodgment 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)

...

Relevantly here, the loan that has been converted to a complying loan agreement will not give rise to an assessable amount under section 109XB of the ITAA 1936 and will not be deemed to be a dividend pursuant to section 109D of the ITAA 1936.

The other loans were not repaid by the lodgment day and were not converted into complying loans. Therefore, the other loans will be deemed to be dividends under section 109D of the ITAA 1936. Further, section 109XB of the ITAA 1936 will give rise to assessable amounts with respect to the other loans.

Amendment History

Year of income:  Year ended 30 June 2005

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

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

Keywords
Borrowings and 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:  19 April 2018

ISSN: 1445-2782