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Edited version of your written advice
Authorisation Number: 1051486072858
Date of advice: 22 February 2019
Ruling
Subject: Section 109RB of the ITAA 1936 – Administrative Discretion
Question
Will the Commissioner exercise his discretion under section 109RB of the ITAA 1936 to disregard the deemed dividends to have been paid from the Company to the Trust?
Answer
Yes
This ruling applies for the following periods:
1 July 2013 – 30 June 2017
The scheme commences on:
1 July 2013
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
The Trust owns a premises.
The Company leases the premises from the Trust and pays rent at market rates.
The Company operates a business from the premises owned by the Trust.
The Company advanced funds to the Trust.
Written loan agreements were in place for the years ended 30 June 2014 -2016 which complied with section 109N of the ITAA 1936, however, no minimum yearly repayments were made.
The new tax agents were formally appointed to provide accounting, taxation and related advisory services.
Upon preparation of financial statements and tax returns for the Taxpayer, the new tax agent identified a number of related party loans.
The directors of the Company contend they were not previously advised on the taxation implications of having unpaid loan balances to a related party.
It is contended the directors had no reason to believe that any taxation issues could arise in relation to the unpaid loan balances.
Corrective action taken to date
The following corrective action has been taken to date:
● Written loan agreements between the Company and the Trust compliant with the requirements as specified in section 109N of the ITAA 1936, for each loan, are in place.
● The minimum yearly repayments (MYR) in accordance with subsection 109E(5) of the ITAA 1936 have been made.
● Interest income has been returned in the income tax returns for the Company for each of the appropriate periods.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 109E
Income Tax Assessment Act 1936 Section 109N
Income Tax Assessment Act 1936 Section 109RB
Detailed reasoning
Section 109RB of the ITAA 1936 gives the Commissioner the discretion to disregard or to frank a deemed dividend that arises under Division 7A of Part III of the ITAA 1936 where the deemed dividend arises because of an honest mistake or inadvertent omission by any of:
● the recipient;
● the private company; or
● any other entity whose conduct contributed to that result.
The Commissioner must take into account the following factors listed at subsection 109RB (3) of the ITAA 1936 when exercising this discretion:
● the circumstances that led to the mistake or omission;
● the extent to which the entities have taken action to correct the mistake or omission and if so, how quickly that action was taken;
● whether Division 7A has operated previously in relation to any of the entities;
● any other matters which the Commissioner considers relevant.
This means that the Commissioner will disregard any deemed dividend that would otherwise have arisen under Division 7A of the ITAA 1936 provided these guidelines are satisfied. It is noted that corrective action has already been taken which is conducive to a positive outcome.
Exercise of Commissioner’s discretion
The corrective action taken to date is accepted by the Commissioner.
In relation to the application of Division 7A that resulted from loans made by the company to the trust, the Commissioner is of the view that the application of Division 7A arose because of an honest mistake.
The Commissioner will exercise his discretion in accordance with subsection 109RB (2) of the ITAA 1936 to disregard the deemed dividends. There are no conditions imposed as corrective action has satisfied any outstanding amounts due and interest income has been included in the Taxpayers income tax returns.
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