Edited version of private ruling

Authorisation Number: 1011788544273

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Ruling

Subject: Deemed Dividends

Question 1

Is a private company taken to have paid a dividend in accordance with subsection 109D(1) of the Income Tax Assessment Act 1936 (ITAA 1936) where the private company receives an assignment of a pre 4 December 1997 amount receivable from an entity that is an associate of a shareholder of the private company?

Answer

No

Question 2

Is a private company taken under section 109T of the ITAA 1936 to make a payment or loan to an entity through an interposed entity where it assigns its right to a pre 4 December 1997 loan to another related private company?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Three entities are associates of each other pursuant to section 318 of the ITAA 1936.

Two of the entities are both private companies and the other is a trust.

According to its financial accounts, one company (the assignor) has an amount receivable from the trust and that amount remains outstanding. As the amount receivable was provided by the company to the trust prior to 4 December 1997 and prior to the introduction of Division 7A of Part III of the ITAA 1936, the amount has not been previously treated as a deemed dividend.

No written contracts were executed in respect of the arrangement relating to the pre 4 December amount receivable. There have been no changes to the terms of the arrangement since 4 December 1997.

The assignor proposes to assign its right to receive payment of the amount outstanding from its associated entity to the other company (the assignee). The assignee will provide market value consideration in respect of the right to assignor.

It is expected that the assignee will exercise its right to receive payments against the outstanding amount from the entity previously owing the money to the assignor.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 109D(1)

Income Tax Assessment Act 1936 Section 109T.

Reasons for decision

Question 1

Is a private company taken to have paid a dividend in accordance with subsection 109D(1) of the ITAA 1936 where the private company receives an assignment of a pre 4 December 1997 amount receivable from an entity that is an associate of a shareholder of the private company?

Subsection 109D(1) of the ITAA 1936 states as follows:

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 lodgement 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) either:

(i) the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made; or

(ii) a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the entity has been such a shareholder or associate at some time.

A loan is defined at subsection 109D(3) of the ITAA 1936 to include:

(a) an advance of money; and

(b) a provision of credit or any other form of financial accommodation; and

(c) a payment of an amount for, on account of, on behalf of or at the request of, an

entity, if there is an express or implied obligation to repay the amount; and

(d) a transaction (whatever its terms or form) which in substance effects a loan of
money

In order for subsection 109D(1) to apply to this arrangement, the private company must "make" a loan to the associated entity.

The facts provided in the application make it clear that the assignor made a loan to the trust prior to 4 December 1997 and that the assignee private company has received an assignment of that loan. The borrower remains obliged to repay the same loan but to a different associate.

For an assignment of a loan to take place it is a necessary precondition that a loan be in existence. In this case that loan was made prior to the proposed assignment. It is not considered that the assignee will make a new loan to the trust by assuming the right to receive repayment of the loan from the assignor. Accordingly subsection 109D(1) does not apply to the proposed arrangement.

As the applicant has limited the questions in his private ruling application specifically to the application of subsection 109D(1) and section 109T of the ITAA 1936 we have not considered the application of section 109F which relates to loans that may be deemed to be dividends where they are forgiven and particularly subsection 109F(5) which deals with the assignments of rights to receive payments from associates. Nor have we considered the general tax avoidance provisions of Part IVA of the ITAA 1936.

Question 2

Is a private company taken under section 109T of the ITAA 1936 to make a payment or loan to an entity through an interposed entity where it assigns its right to a pre 4 December 1997 loan to another related private company?

Subsection 109T(1) of the ITAA 1936 states as follows:

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

Subsection 109T(2) of the ITAA 1936 goes on to state that:

For the purposes of this section, it does not matter:

(a) whether the interposed entity made the payment or loan to the target entity before, after or at the same time as the first interposed entity received the payment or loan from the private company; or

(b) whether or not the interposed entity paid or lent the target entity the same amount as the private company paid or lent the first interposed entity.

In order for subsection 109T(1) to apply to the proposed arrangement the interposed entity would need to make a payment or loan to the target entity. As stated above we do not consider that the interposed entity will make a loan to the associated entity. Accordingly subsection 109T(1) does not apply to the proposed arrangement.

As the applicant has limited the questions in their private ruling application specifically to the application of subsection 109D(1) and section 109T we have not considered the application of section 109F which relates to loans that may be deemed to be dividends where they are forgiven and particularly subsection 109F(5) which deals with the assignments of rights to receive payments from associates. Nor have we considered the general tax avoidance provisions of Part IVA of the ITAA 1936.