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Ruling
Subject: Division 7A
Question
Is the company taken to have paid a dividend to the executor of the deceased estate, of an individual who was a shareholder in the company, in respect of a loan the company made to the shareholder before they died?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commences on:
1 July 2008
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.
A loan was entered into under a written agreement entered into by the company, and one of its shareholders.
The written agreement met the criteria concerning minimum interest rate and maximum term contained in section 109N of the ITAA 1936.
The shareholder died during the income year ended 30 June 2008.
No repayments in relation to the loan were made in the tax year ending 30 June 2008, 30 June 2009 and 30 June2010 by either the shareholder or the executor of his deceased estate.
Relevant legislative provisions
Division 7A of the Income Tax Assessment Act 1936
Section 109E of the Income Tax Assessment Act 1936
Subsection 109E(1) of the Income Tax Assessment Act 1936
Section 109D of the Income Tax Assessment Act 1936
Subsection 109D(1) of the Income Tax Assessment Act 1936
Reasons for decision
Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates). In particular, advances, loans and other payments or credits to shareholders (or their associates) are, unless they come within specific exclusions, treated as assessable dividends to the extent that a company has a distributable surplus.
There are two type of loans considered and they are contained in Section 109D of the ITAA 1936 and Section 109E of the ITAA 1936
Subsection 109E (1) of the ITAA 1936 states:
'A private company is taken to pay a dividend to an entity at the end of one of the private company's year of income (the "current year") if:
(a) the private company made an amalgamated loan to the entity in an earlier year of income...' [emphasis added]
Subsection 109D (1) of the ITAA 1936 states
'A private company is taken to pay a dividend to an entity at the end of one of the private company's year of income (the "current year") if:
(a) the private company makes a loan to the entity during the current year income...' [emphasis added
The entity to which the private company is taken to have paid the dividend must be the same entity to which the private company made the amalgamated loan.
Therefore, the private company must have made the loan to the executor of the deceased estate.
As the company did not enter into an agreement with the Estate of the deceased, the company does not have to declare a deemed dividend to the Estate because the executor of the shareholder's deceased estate is not treated as having received a deemed dividend in respect of the loan.