Edited version of private advice

Authorisation Number: 1052405128474

Date of advice: 06 June 2025

Ruling

Subject: Division 7A

Question

Will Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the loan made by Company A to Trust C in the 202X income tax year?

Answer

Yes. However, where the loan is placed onto terms compliant with section 109N of the ITAA 1936 there will be no deemed dividend in the 202X income tax year.

This ruling applies for the following period:

Year ended 30 June 202X

The scheme commenced on:

1 July 202X

Relevant facts and circumstances

Company A is a private company.

The director of Company A is Individual Y.

The sole shareholder of Company A is Company B. The shares are held non-beneficially.

Trust C is a family trust. The Trustee of Trust C is Company B.

The directors and equal shareholders of Company B are Individual A and Individual B.

In the 202X income tax year Company A has loaned an amount of money to Trust C.

The loan has been placed onto a Division 7A compliant loan agreement.

Trust C has used the loan to purchase various investments.

Trust C has also used loans, provided by Individual A and Individual B to purchase other investments

Relevant legislative provisions

Income Tax assessment Act 1936 section 109D

Income Tax assessment Act 1936 section 109E

Income Tax assessment Act 1936 section 109N

Income Tax assessment Act 1936 Subdivision D

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

All references are to the Income Tax Assessment Act 1936 unless otherwise noted.

Under Division 7A amounts paid, lent or forgiven by a private company to certain associated entities are treated as dividends, unless they come within specific exclusions.

The provisions apply where the recipient of the payment, loan or forgiven amount is a shareholder or an associate of a shareholder of the private company.

Loans treated as dividends in year of making

Under subsection 109D(1) a private company is taken to pay a dividend to an entity at the end of the private company's year of income if:

•                the private company makes a loan to the entity during the income year, and

•                the loan is not fully repaid before lodgment day for that income year, and

•                Subdivision D does not prevent the private company from being taken to pay a dividend, and

•                either the entity is a shareholder, or an associate of a shareholder, when the loan is made or a reasonable person would conclude the loan was made because the entity has been a shareholder or associate at some time.

The ultimate use of the funds by the shareholder or associate is not relevant, unless related to the purchase of certain ESS interests, to determine whether Division 7A applies when a loan is made from a private company to a shareholder or an associate of a shareholder.

Exclusions

Subdivision D contains the exclusions to Division 7A and provides the rules for when a payment or loan is not to be not treated as a dividend.

Under Subdivision D the following sorts of loans are not treated as dividends:

•                loans to other companies (section 109K);

•                loans that are otherwise assessable (section 109L);

•                loans made in the ordinary course of business on ordinary commercial terms (section 109M);

•                loans that meet criteria for minimum interest rate and maximum term (section 109N);

•                certain loans and distributions by liquidators (section 109NA);

•                loans that are for the purpose of funding the purchase of certain ESS interests under an employee share scheme (section 109NB)

The loan from Company A to Trust C is a loan from a private company to a shareholder or an associate of a shareholder in the 202X income tax year. Therefore, the loan will fall under Division 7A and unless excluded or repaid in full before lodgment day will be taken to be a dividend paid by Company A to Trust C under section 109D.

Company A is not considered to be in the business of money lending so the exclusion under section 109M does not apply. The loan is not to another company and nor is it considered to be otherwise assessable income to Sugnoc Trust so the exceptions under 109K and 109L do not apply. The loan has not been made by a liquidator and has not been used for the purchase of ESS interests so the exceptions in section 109NA and 109NB do not apply.

You have stated the loan was placed onto complying Division 7A terms. Under section 109N loans meeting the criteria for minimum interest rate and maximum term are not treated as dividends.

The criteria for the loan agreement are:

•                the loan agreement must made in writing

•                the interest rate must equal or exceed the benchmark interest rate

•                the term must no exceed the maximum term, being 25 years for a loan secured by a mortgage over real property (paragraph 109N(3)(a)) or 7 years for any other loan.

Under subsection 109N(1) the above criteria must be satisfied prior to lodgment day of the income year in which the loan was made.

Therefore, where the loan agreement is compliant with section 109N, and satisfies the relevant criteria before lodgment day of the company for the 202X income tax year the loan will be excluded from being a dividend taken to be paid by Company A to Trust C in the 202X income tax year. The repayments of the loan in the following income tax years will need to meet the minimum yearly repayment amounts as set out in section 109E.

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