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Edited version of your written advice

Authorisation Number: 1012665276253

Ruling

Subject: Division 7A

Question 1

Will section 109D in Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) deem Private Company A to have paid you a dividend where it:

• makes a payment to the trustee of a trust established to provide loans to its employees, and

• that trustee loans an amount to you as an employee of Private Company A?

Answer

No, insofar as the loan is made when; neither you nor any of your associates are shareholders in Private Company A; and no reasonable person would conclude that the loan is made because you or any of your associates were a shareholder in Private Company A at some earlier time.

This ruling applies for the following period:

Financial year ending 30 June 2015.

Relevant facts and circumstances

1. Private Company A is a private company and a resident of Australia.

2. You are a natural person employee of Private Company A.

3. Private Company A wishes to establish an arrangement to provide share based benefits to its employees via a trust (herein referred to as the share trust).

4. The only entities that will benefit under the share trust are employees of Private Company A.

5. Private Company A will settle by way of a single lump sum payment of cash an amount of capital on the share trust for the benefit of its employees as a general class. This is called the cash contribution. No further contributions will be paid to the trustee of the share trust.

6. The trustee of the share trust will use the cash contribution to make loans to the employees of Private Company A, including to you. You will apply the loan funds from the trustee of the share trust to subscribe for units in the share trust.

7. Neither the trustee of the share trust, nor any of its associates, will be a shareholder in Private Company A when Private Company A pays the cash contribution.

8. No employee of Private Company A, nor the associate of any such employee, will be a shareholder in Private Company A when Private Company A pays the cash contribution.

9. The trustee of the share trust will not be a shareholder in Private Company A when that trustee makes a loan to you.

10. Neither you, nor any of your associates, will be a shareholder in Private Company A when the trustee of the share trust makes the loan to you.

11. The trustee of the share trust will apply the subscription monies received from you to acquire ordinary shares in Private Company A.

Assumptions

1. No reasonable person would conclude that the cash contribution payment to the trustee of the share trust is made because that trustee, an employee of Private Company A, or an associate of either was at some time a shareholder in Private Company A.

2. No reasonable person would conclude that the trustee of the share trust made the loan to you because you or an associate of yours was at some time a shareholder in Private Company A.

Relevant legislative provisions

Division 7A of the ITAA 1936

Section 109D of the ITAA 1936

Reasons for decision

1. The purpose of Division 7A of the ITAA 1936 is to ensure private companies cannot make tax-free distributions of profits to shareholders (and their associates) in the form of payments or loans. It ensures amounts lent or paid are treated as dividends and are assessable income of the shareholder or associate.

2. Section 109D of the ITAA 1936 deems amounts lent by a private company to a shareholder or shareholder's associate1 to be dividends. It may also apply where an amount is paid to an interposed entity as part of an arrangement to make a loan to a shareholder or shareholder's associate.2

3. Private Company A and the trustee of the share trust will not make any loan to a shareholder in Private Company A or to the associate of such a shareholder. Consequently, section 109D of the ITAA 1936 will not apply.

1 Section 318 of the ITAA 1936 sets out the meaning of associates.

2 See sections 109T and 109W of the ITAA 1936.

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