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Edited version of private advice
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Ruling
Subject: Deceased Estate - Division 7A and dividends
Questions and answers
1. Where a loan has been made by the company as trustee for the trust to the deceased, during a number of financial years, the loans have not been repaid, and the deceased subsequently dies before the lodgment day of the trust for those financial years; is either the company or company 1, or both, taken to have paid an unfranked dividend to the administrator of the estate of the deceased under subsection 109XA(2) and subsection 109XB of the Income Tax Assessment Act 1936 (ITAA 1936)?
No.
2. Where a loan has been made to the deceased during their lifetime and the deceased subsequently dies, if the loan is forgiven prior to the granting of administration:
a) If the loan was made by company 1, is the forgiven loan deemed to be an unfranked dividend under subsection 109F(1) of the ITAA 1936 to the holder of the assets?
Yes.
b) If the loan was made by the trust 2, is the forgiven loan deemed to be an unfranked dividend under subsection 109XA(3) and section 109XB to the holder of the assets?
Yes.
c) If the loan was made by the trust, is the forgiven loan deemed to be an unfranked dividend under subsection 109XA(3) and section 109XB to the holder of the assets?
Yes.
3. Where a loan has been made to the deceased in their lifetime and the deceased subsequently dies, if the loan is forgiven after the granting of administration:
a) If the loan was made by company 1, is the forgiven loan deemed to be an unfranked dividend under subsection 109F(1) of the ITAA 1936 to the administrator of the estate of the deceased?
Yes.
b) If the loan was made by trust 2, is the forgiven loan deemed to be an unfranked dividend under subsection 109XA(3) and section 109XB to the administrator of the estate of the deceased?
Yes.
c) If the loan was made by the trust, is the forgiven loan deemed to be an unfranked dividend under subsection 109XA(3) and section 109XB to the administrator of the estate of the deceased?
Yes.
This ruling applies for the following period(s)
1 July 2013 to 30 June 2014
1 July 2014 to 30 June 2015
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.
Company 1 is a private company; the shareholder recorded in the register of members is the deceased.
The company is a private company; the shareholder recorded in the register of members is the deceased.
The deceased passed away.
Individual 1 is the proposed administrator of the estate of the deceased.
The deceased left a Will (the old Will) in which they appointed another person as the executor of the estate.
Prior to their death, the deceased was in the process of making a new Will that was prepared in draft but was unsigned prior to death.
The unsigned draft Will of the deceased appoints individual 1 as the executor of the deceased's estate.
Upon the deceased's passing, it was thought that they did not have a valid Will but rather an informal Will. Subsequently an old Will executed by the deceased was located.
The executor named in the Will formally renounced their executorship in favour of the appointment of individual 1.
An application will be made to the Supreme Court to request that a grant of administration be made to individual 1 in respect of the old Will.
There may be delays in the grant of administration as the original Will of the deceased has not been located and efforts are being undertaken to locate the witnesses to the Will for the purpose of proving the copy of the deceased's Will as being a true copy.
Alternatively; written consent will be acquired from all the beneficiaries to accept the Will copy.
At the time of the application probate has not been granted and it is unknown when it will be granted.
State legislation deems the deceased's property to vest in a holder of the assets until a grant of probate or administration is made by the Supreme Court and an executor is duly appointed.
The deceased has borrowed, during their lifetime;
• A sum from company 1
• A sum from trust 2
• A sum from the trust
The money borrowed by the deceased from the company 1 and trust 2 was evidenced by separate Division 7A loan agreements, in respect of each entity.
In each financial year the minimum loan repayments were made by the deceased to company 1 by way of dividends declared to the deceased, with the monetary amount of those dividends retained by company 1 by way of loan repayments from the deceased to company1.
In each financial year the minimum loan repayments were made by the deceased to trust 2 to reduce the amount of the loans owed to trust 2 in accordance with the Division 7A loan agreement.
Repayments to company 1 and trust 2 were not made for a number of financial years due to the deceased's passing.
In a number of years of income, the trust owed trust 2 a sum by way of an unpaid present entitlement to income of the trust. Trust 2 in turn owed company 1 a sum and the company a sum.
The trust made a loan or loans to the deceased in a number of financial years. The loans made were not recorded in writing or repaid before the lodgment date for trust due to the deceased's passing.
The loans made to the deceased by the trust were not amalgamated loans for the purpose of section 109E of the Income Tax Assessment Act 1936.
At the time that the loans were made to the deceased, by the trust, the deceased was the only shareholder of both the company and company 1.
Company 1, trust 2 and trust 1 wish to simplify their affairs by forgiving the loans made to the deceased during their lifetime, following their passing.
Company 1, trust 2 and trust 1 each intend to forgive the loans made to the deceased by executing a deed poll to that effect in the 2014 financial year.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 109D
Income Tax Assessment Act 1936 Section 109E
Income Tax Assessment Act 1936 subsection 109E(3)
Income Tax Assessment Act 1936 subsection 109E(4)
Income Tax Assessment Act 1936 Section 109F
Income Tax Assessment Act 1936 subsection 109F(1)
Income Tax Assessment Act 1936 subsection 109F(2)
Income Tax Assessment Act 1936 subsection 109F97)
Income Tax Assessment Act 1936 Section 109N
Income Tax Assessment Act 1936 subsection 109XA(2)
Income Tax Assessment Act 1936 subsection 109XA(3)
Income Tax Assessment Act 1936 Section 109XB
Income Tax Assessment Act 1936 Section 109Y
Does Part IVA apply to this ruling?
Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.
We have not considered the application of Part IVA to the arrangement you asked us to rule on.
Reasons for decision
Question 1
Under section 109XB of the Income Tax Assessment Act 1936 (ITAA 1936);
an amount is included, as if it were a dividend paid by the company at the end of the year of income of the company in which the actual transaction took place, in the assessable income of the shareholder or associate referred to in subsection 109XA(1), (2) or (3) if:
(a) had the actual transaction been done by a private company (the notional company); and
(b) had the shareholder or associate been a shareholder of the notional company at the time the actual transaction took place;
an amount (the Division 7A amount) would have been included in the shareholder's or associate's assessable income because of a provision of this Division outside this Subdivision.
Under subsection 109XA(2) of the ITAA 1936 relating to loans;
Section 109XB applies if:
(a) a trustee makes a loan (including a loan through an interposed entity as described in section 109XG) to a shareholder or an associate of a shareholder of a private company (except a shareholder or associate that is a company) (the actual transaction); and |
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(b) either: (i) the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place; or (ii) the company becomes presently entitled to an amount from the net income of the trust estate after the actual transaction takes place, but before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place, and the whole of the amount has not been paid to the company before the earlier of those dates. | |
Under section 109D of the ITAA 1936 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 lodgment day for the current year; and |
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(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.
Section 109E 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 years of income (the current year) if:
(a) the private company made an amalgamated loan to the entity in an earlier year of income; and
(b) the amalgamated loan is not repaid at the end of the current year; and
(c) the amount (if any) paid to the private company during the current year in relation to the amalgamated loan falls short of the minimum yearly repayment of the amalgamated loan worked out |
Where a loan(s) is made by a private company which otherwise meets section 109E of the ITAA 1936 Interpretative Decision ATO2002/741 states;
The entity to whom the private company is taken to have paid the dividend must be the same entity to whom the private company made the loan.
Application to your circumstances
The trust owed trust 2 an unpaid present entitlement to income of the trust. Trust 2 in turn owed company 1 and the company an amount.
The trust made a loan or loans to the deceased.
The loans made to the deceased by the trust, if not repaid by the trust's lodgment date, are potentially treated as deemed unfranked dividends subsection 109XA(2) and section 109XB of the ITAA 1936 where either of section 109D or section 109E of the ITAA 1936 would apply in the event that the loan was made to the deceased either by the company or company1.
The loans made by the trust to the deceased were not recorded in writing or repaid before the lodgment date for trust due to the deceased's passing. Consequently the loans do not meet section 109N or 109E of the ITAA 1936 and section 109D of the ITAA 1936 is the relevant provision to be considered under these circumstances.
Section 109D and 109E of the ITAA 1936 are similar in their terms and ATO ID 2002/741 may be interpreted to include section 109D of the ITAA 1936.
Therefore, for 109D to apply the loan would need to have made to the executors of the deceased estate.
The loan was made to the deceased (a shareholder) during their lifetime, neither company 1 or company 2 are taken to have paid an unfranked dividend to the administrator of the estate of the deceased under subsection 109XA(2) and subsection 109XB of the ITAA 1936.
Question 2
Under section 109XA(3) if the ITAA 1936 section 109XB applies if:
(a) all or part of a debt owed to a trustee by a shareholder or an associate of a shareholder of a private company is forgiven (except where the shareholder or associate is a company) (the actual transaction); and
(b) either: (i) the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place; or (ii) the company becomes presently entitled to an amount from the net income of the trust estate after the actual transaction takes place, but before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place, and the whole of the amount has not been paid to the company before the earlier of those dates. |
For the purposes of Division 7A of Part III, an amalgamated loan is taken to have been made during an income year if a private company makes a constituent loan, or loans, to an entity during the income year which:
a) are not fully repaid before the company's lodgment day for the year,
b) would cause the company to be taken under section 109D to pay a dividend to the entity at the end of the year, apart from section 109N, and
c) have the same maximum term for the purposes of section 109N (subsection 109E(3)).
Repayments made in respect of the loan are taken to be repayments made in relation to the amalgamated loan (subsection 109E(4)).
Under subsection 109F(1) a private company is taken to pay a dividend to an entity at the end of the private company's year of income if all or part of a debt the entity owed the private company is forgiven in that year and either:
a) the amount is forgiven when the entity is a shareholder in the private company, or an associate of such a shareholder; or
b) a reasonable person would conclude (having regard to all the circumstances) that the amount is forgiven because the entity has been such a shareholder or associate at some time.
If a private company forgives an amount of debt resulting from a constituent loan taken into account in working out the amount of an amalgamated loan under subsection 109E(3), the private company is taken to forgive the same amount of debt resulting from the amalgamated loan (subsection 109F(7)).
Under subsection 109F(2) the amount of the dividend is equal to the amount of debt forgiven, subject to the private company's distributable surplus as calculated under section 109Y.
Application to your circumstances
The money borrowed by the deceased from the company 1 and trust 2 was evidenced by separate Division 7A loan agreements, in respect of each entity.
In each financial year the minimum loan repayments were made by the deceased to company 1 by way of dividends declared to the deceased, with the monetary amount of those dividends retained by company 1 by way of loan repayments from the deceased to company1.
In each financial year the minimum loan repayments were made by the deceased to trust 2 to reduce the amount of the loans owed to trust 2 in accordance with the Division 7A loan agreement.
Repayments to company 1 and trust 2 were not made for each of a number of financial years due to the deceased's passing.
At the time of the application, probate has not been granted and it is unknown when it will be granted.
State legislation deems the deceased's property to vest in a holder of the assets until a grant of probate or administration is made by the Supreme Court and an executor is duly appointed.
As you point out the purpose of this section is to ensure that there is ownership of the real and personal assets of the deceased until probate or administration of the estate. This makes the holder of the assets the owner of the relevant shares until probate is granted.
Consequently, if the loan made by company 1 is forgiven, prior to probate being granted, there will be deemed unfranked dividend under section 109F(1) of the ITAA 1936 to the holder of the assets.
If the loan made by trust 2 is forgiven, prior to probate being granted, there will be a deemed unfranked dividend under section 109XA(3) and section 109XB of the ITAA 1936 to the holder of the assets.
If the loan made by the trust is forgiven, prior to probate being granted, there will be a deemed unfranked dividend under section 109XA(3) and section 109XB of the ITAA 1936 to holder of the assets.
Question 3
Under section 109XA(3) if the ITAA 1936 section 109XB applies if:
(a) all or part of a debt owed to a trustee by a shareholder or an associate of a shareholder of a private company is forgiven (except where the shareholder or associate is a company) (the actual transaction); and
(b) either: (i) the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place; or (ii) the company becomes presently entitled to an amount from the net income of the trust estate after the actual transaction takes place, but before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place, and the whole of the amount has not been paid to the company before the earlier of those dates. |
For the purposes of Division 7A of Part III, an amalgamated loan is taken to have been made during an income year if a private company makes a constituent loan, or loans, to an entity during the income year which:
d) are not fully repaid before the company's lodgment day for the year,
e) would cause the company to be taken under section 109D to pay a dividend to the entity at the end of the year, apart from section 109N, and
f) have the same maximum term for the purposes of section 109N (subsection 109E(3)).
Repayments made in respect of the loan are taken to be repayments made in relation to the amalgamated loan (subsection 109E(4)).
Under subsection 109F(1) a private company is taken to pay a dividend to an entity at the end of the private company's year of income if all or part of a debt the entity owed the private company is forgiven in that year and either:
c) the amount is forgiven when the entity is a shareholder in the private company, or an associate of such a shareholder; or
d) a reasonable person would conclude (having regard to all the circumstances) that the amount is forgiven because the entity has been such a shareholder or associate at some time.
If a private company forgives an amount of debt resulting from a constituent loan taken into account in working out the amount of an amalgamated loan under subsection 109E(3), the private company is taken to forgive the same amount of debt resulting from the amalgamated loan (subsection 109F(7)).
Under subsection 109F(2) the amount of the dividend is equal to the amount of debt forgiven, subject to the private company's distributable surplus as calculated under section 109Y.
Following the Grant of Probate, the legal personal representative immediately assumes liability to pay the deceased's debts (including the debt owed by the deceased to the private company (the amalgamated loan)).
Application to your circumstances
Consequently, if the loan made by company 1 is forgiven, after probate has been granted, the private company is taken to have paid a dividend to the legal personal representative shareholder under section 109F(1) of the ITAA 1936.
If the loan made by trust 2 is forgiven, after probate has been granted, the private company is taken to have paid a dividend to the legal personal representative shareholder under section 109XA(3) and section 109XB of the ITAA 1936.