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Edited version of your private ruling
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Ruling
Subject: Income - Division 7A
Question and answer
Are you assessable, under Division 7A, on funds withdrawn from a private company by your spouse?
No.
This ruling applies for the following periods
1 July 2011 to 30 June 2012
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.
You were married to your spouse for many years.
You are a director of the company.
Your spouse was a director and shareholder of the company.
You have never received a direct benefit as a director of the company and have not been entitled to one.
Your spouse withdrew funds from the company bank account and deposited the money into a personal bank account.
Your spouse withdrew further funds from the company and deposited the money into a personal bank account. You are unable to advise the date of this transaction as the company has denied you access to any information.
On advice from the accountant your spouse, every year, withdrew funds from the company and paid the funds back within the year from the dividend received from the company.
Due to a lack of documentation you are unable to determine whether there is distribution of a surplus or not.
You do not have any documentation which indicates your spouse's intentions when withdrawing the funds from the company.
Your spouse used the funds to pay out mortgages on two rental properties held by both of you as joint tenants.
The loans on the two rental properties were in both your names.
You were not aware of any of these transactions.
You had no access to the accounts of the company at any time.
Your spouse unexpectedly passed away.
Your spouse's Will states that the estate is to be split in five equal shares between you and your spouse's four children.
Due to friction amongst your spouse's children and yourself you were advised to resign as director of the company.
You resigned your directorship of the company.
No Division 7A loan was drawn up prior to your spouse's passing.
The company has requested you sign a Division 7A loan agreement for the sum your spouse withdrew from the company. This was when you became aware of the withdrawals by your deceased spouse.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 109D(1)
Income Tax Assessment Act 1936 Section 109E(1)
Reasons for decision
109D(1) of the Income Tax Assessment Act 1936 (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 years of income (the current year) if:
(a) the private company makes a loan to the entity during the current year;..
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:
(i) the private company made an amalgamated loan to the entity in an earlier year of income...
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.
Application to your circumstances
Your spouse withdrew funds from the company; a transaction which occurred solely between the private company and your spouse (the entity).
Consequently you are not liable for the funds withdrawn from the company by your spouse.