Edited version of your private ruling

Authorisation Number: 1012480776049

Ruling

Subject: Payout of loan

Question 1

Is the taxpayer required to include an amount in his assessable income in relation to any money or property received in satisfaction of a company's loan account owing to the taxpayer under any of the following provisions:

· capital gains tax (CGT) event G1 in section 104-135 of the Income Tax Assessment Act 1997 (ITAA 1997)

· subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936)

· subsection 109C(1) of the ITAA 1936

· section 47A of the ITAA 1936, or

· section 45B and 45C of the ITAA 1936?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

A company had a loan account debt to the taxpayer as a result of contributions made by the taxpayer to the company.

The company has paid out the loan account to the taxpayer.

Relevant legislative provisions

ITAA 1936 subsection 44(1).

ITAA 1936 subsection 109C(1)

ITAA 1936 section 47A

ITAA 1936 section 45B and 45C

ITAA 1997 section 104-135

Reasons for decision

CGT event G1

Section 104-135 of the ITAA 1997 provides that CGT event G1 may happen when a company makes a payment to you in respect of a share you own in the company.

In the present case, the paying out of the loan account was not made in respect of a share, but rather in discharging an obligation owing. Shares and cash were provided to the company by the taxpayer and an obligation to repay the provider the cash and market value of the shares was represented by an entry to his loan account.

CGT event G1 did not happen when the loan account was paid out.

Subsection 44(1)

Subsection 44(1) of the ITAA 1936 includes in the assessable income of a shareholder in a company (whether the company is a resident or a non-resident) in the case of a resident shareholder, dividends that are paid to the shareholder by the company out of profits derived by it from any source, and in the case of a non-resident shareholder, out of profits derived from sources in Australia.

The definition of 'dividend' in subsection 6(1) extends the meaning of the term beyond its ordinary meaning to include any distribution by a company to its shareholders in money or property, but subject to an exclusion in all cases for an amount debited to amounts standing to the credit of the company's share capital account.

In the present case, the paying out of the loan account was the discharge of an obligation owing and not a distribution of the profits of the company.

The discharge of the loan account will not be assessable under subsection 44(1) of the ITAA 1936 as a dividend.

Section 109C

Subsection 109C(1) of the ITAA 1936 provides that a private company may be taken to have paid a dividend to an entity if it pays an amount to the entity when it is a shareholder or an associate of the shareholder.

Section 109J of the ITAA 1936 provides an exclusion as follows:

A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment:

discharges an obligation of the private company to pay money to the entity; and

is not more that would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length.

The discharge of the loan account obligation is the result of the crediting of cash and the market value of shares provided to the company by the loan account holder and is therefore not more than would have been required in an arm's length dealing.

Subsection 109C(1) of the ITAA 1936 will not apply to deem the payment to be a dividend.

Section 47A

Section 47A of the ITAA 1936 treats certain payments made by a controlled foreign company (CFC) as dividends where they are a distribution of profits.

In the present case, the paying out of the loan account is the discharge of an obligation owing and not a distribution of the profits of the company.

Section 47A of the ITAA 1936 will not apply to treat the payout of the loan account as a dividend.

Section 45B

Section 45B of the ITAA 1936 operates as an anti-avoidance provision to ensure that relevant amounts are treated as dividends if certain payments, allocations and distributions are made in substitution for dividends.

Section 45B of the ITAA 1936 applies where a person is provided with a demerger benefit or a capital benefit under a scheme and a non-incidental purpose was to obtain a tax benefit.

Subsection 45B(5) of the ITAA 1936 explains the meaning of 'provided with a capital benefit' as follows:

Meaning of provided with a capital benefit. A reference to a person being provided with a capital benefit is a reference to any of the following:

· the provision of ownership interests in a company to the person;

· the distribution to the person of share capital or share premium;

· something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) this is held by the person.

Practice Statement Law Administration PSLA 2008/10 provides guidance on the application of section 45B of the ITAA 1936.

In the present case, a loan account owing to the taxpayer was paid out by the company. The balance of the loan account originated from the taxpayer providing contributions to the company.

The paying out of the loan account will not result in the provision of ownership interests, the distribution of share capital or share premium or an increase in the value of an ownership interest.

The taxpayer will therefore not be provided with a capital benefit as a result of the paying out of the loan account.

The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to a capital benefit.