Edited version of your written advice

Authorisation Number: 1012536616938

Ruling

Subject: Loans to Associated Entities

Question 1

Would, as a result of the:

a. loan from Company X to Company A;

b. the Application of the Funds by Company A;

c. loan from Company X to Company B;

d. the Application of the Funds by Company B;

e. loan from Company X to Company C; or

f. The Application of the Funds by Company C;

there be an amount taken to be a dividend from Company X pursuant to Division 7A of the Income Tax Assessment Act 1936 and, as a consequence, a debit to Entity 1's franking credit account pursuant to section 205-30 of Income Tax Assessment Act 1997?

Answer

No

Question 2

Would the:

a. loan from Company X to Company A;

b. loan from Company X to Company B; or

c. loan from Company X to Company C;

be a 'dividend' within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 that is included in Entity 1's assessable income pursuant to section 44 of that Act?

Answer

No

This ruling applies for the following period(s)

1 July 2011 - 30 June 2015

The scheme commences on

1 July 2011

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.

Background

Company X was one of several entities involved in a business founded by Entity 1 and Entity 2.

The directors of X are Entity 1 and Entity 3. Entity X has issued capital of a number of shares, some of which are held by Entity 1 and the remainder by Entity 2. Entity 1 and Entity 2 are associated with Entity 3, Entity 4 and Entity 5.

Entity 1 and Entity 2 intend that the relevant Entities will ultimately benefit from their wealth.

Entity 1 and Entity 2 have decided to provide a share of capital to three companies, each of which is controlled by one of the entities.

The Companies

Company A is incorporated. That entity has issued capital of ordinary shares:

a. a number of which is held by Entity 4; and,

b. with the remaining held by Trust 4.

The sole director of Company A is Entity 4.

Company 4, is trustee for Trust 4.

Company 4 is incorporated. The sole director and shareholder of Company 4 is Entity 4.

Company B is incorporated. That entity has issued capital of ordinary shares:

a. a number of which is held by Entity 3; and,

b. with the remaining held by Trust 3.

The sole director of Company B is Entity 3.

Company C is incorporated. That entity has issued capital of ordinary shares, a number of which are held by Entity 1 and Entity 2.

The sole director of Company C is Entity 5.

Company 5, is trustee for Trust 5.

Company 5 is incorporated. The sole director and shareholder of Company 5 is Entity 5.

The Loan to Company A

$ was advanced from Company X to Company A. The amount was advanced on oral terms. (the Loan) However, those oral terms are recorded in a yet to be executed written loan agreement (the Loan Agreement).

The Loan Agreement provides that the principal is not repayable until it is demanded by the Lender or a Demand Notice is issued. That is, the Loan Principal is not repayable until called upon by Company X or until a demand is issued.

The Loan Principal is the amount advanced and no further amounts are intended to be advanced.

Under the Loan Agreement, Money Owing includes the Loan Principal and other amounts, including interest.

The Loan Principal is advanced interest free, except in certain circumstances where Company X has the discretion to charge or issue a demand.

Company X can also issue an Interest Notice seeking interest or it can, see repayment of the Loan Principal and all other Money Owing.

Interest can be payable from the Advance Date, which means the date upon which any part of the Loan Principal was first advanced to the company's.

The Application of the Funds

The company's all have applied the funds advanced to it to savings accounts and term deposits.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936 Section 109B

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 Section 109CA

Income Tax Assessment Act 1936 Section 109K

Income Tax Assessment Act 1936 Section 109N

Income Tax Assessment Act 1936 Section 109T

Income Tax Assessment Act 1936 Section 109Y

Income Tax Assessment Act 1936 Section 109Z

Income Tax Assessment Act 1936 Section 159GQ

Income Tax Assessment Act 1936 Section 159GP

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 109D

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 Subsection 230-15(1)

Income Tax Assessment Act 1997 Subsection 205-30(1)

Income Tax Assessment Act 1997 Subsection 960-120(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Subsection 205-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that "The following table sets out when a debit arises in the *franking account of an entity and the amount of the debit. The debit is called a franking debit."

The table sets out several items, none of which are applicable.

If one of those items was to be relevant, it would likely be Item 1.

That item provides that if "the entity franks a distribution" there is a debit to the company's franking account. Subsection 995-1(1) of the ITAA 1997 provides that "In this Act, except so far as the contrary intention appears: … distribution, by a corporate tax entity, has the meaning given by section 960-120." Subsection 960-120(1) of the ITAA 1997 provides that "what constitutes a distribution" by a company is "a dividend, or something that is taken to be a dividend, under this Act": Item 1.

Section 109K of the Income Tax Assessment Act 1936 (ITAA 1936) disregards the loan from Company X to Company A, Company B and Company C as a deemed dividend. Accordingly, there is no distribution for the purpose of a franking debit.

Question 2

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) relevantly provides that:

In this Act, unless the contrary intention appears:

dividend includes:

any distribution made by a company to any of its shareholders, whether in money or other property; and

any amount credited by a company to any of its shareholders as shareholders;

but does not include: …

The definition requires there to be a distribution or an amount credited by a company to its shareholders. In this case, the loans are made from Company X to non-shareholder companies. That is, Company's A, B and C are not shareholders of Company X. Accordingly, the loans do not meet either paragraph (a) or paragraph (b) of the definition, as it is not from Company X "to any of its shareholders". Accordingly, there is no such 'dividend' to Entity 1.

Paragraph 44(1)(a) of the ITAA 1936 relevantly provides that:

The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes:

if the shareholder is a resident:

dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

all non-share dividends paid to the shareholder by the company; …

Dividends, as referred to in paragraph (a) are those "paid to the shareholder by the company". Accordingly, no amount will be included in Entity 1's assessable income for the loans paid to Company's A, B or C pursuant to section 44 of the Act.