| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1013123836003
NOTICE
This edited version has been found to be misleading or incorrect. It does not represent the ATO’s view of the relevant law.
This notice must not be taken to imply anything about:
● the binding nature of the private advice issued to the applicant
● the correctness of other edited versions.
Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.
Date of advice: 18 November 2016
Ruling
Subject: Debt forgiveness
Question 1
Are the loans the Company made to the shareholder who died taken to be a dividend paid by the Company to the deceased on or before the date of death?
Answer
No.
Question 2
Will section 109F of the Income Tax Assessment Act 1936 (ITAA 1936) operate so that the Company is taken to have paid a dividend to the deceased's legal personal representative for the amount of the amalgamated loan the Company made to the shareholder who died and the Company forgives the debt prior to the grant of probate?
Answer
No.
Question 3
Will the loans the Company made to the shareholder who died be taken to be a dividend payable by the Company to the deceased's legal personal representative in the event of the debt not being forgiven and probate not being granted by 30 June 20XX?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 201X
Year ended 30 June 201X
The scheme commences on:
1 July 201X
Relevant facts and circumstances
Individual X was the sole shareholder of the Company.
The Company made loans to Individual X during a year of income.
The loans were subject to a written loan agreement that satisfied the requirements of section 109N of the ITAA 1936.
The Company had a sufficient distributable surplus for the purposes of section 109Y of the ITAA 1936.
Individual X passed away in the same year the loans were made and left a Will.
A grant of probate to administer the estate has not yet been granted to the deceased's legal personal representative.
The deceased's legal personal representative is not yet in a position to apply for probate due to the ongoing action involved in ascertaining the value of the estate.
The Company has not yet lodged its income tax return for the financial year in which the loans were made.
Relevant legislative provisions
Income Tax Assessment Act 1936 subsection 109D(1)
Income Tax Assessment Act 1936 subsection 109F(1)
Reasons for decision
Is a dividend payable as at the date of death of the shareholder?
Division 7A of Part III of the ITAA 1936 is an integrity measure aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates).
Subsection 109D(1) of the ITAA 1936 operates so that a private company is taken to pay a dividend to an entity (a current or former shareholder or their associate) at the end of one of the private company's years of income if:
● the company makes a loan to the entity during the year,
● the loan is not fully repaid before the lodgment day for the year, and
● the loan is not subject to a written loan agreement that satisfies the requirements of section 109N of the ITAA 1936.
In this case, the Company made three loans to the shareholder, the loans were subject to a written loan agreement that satisfied the requirements of section 109N of the ITAA 1936 and the shareholder passed away later that same year.
ATO ID 2002/741 provides that where a shareholder to whom a private company has made a loan dies, there can be no deemed dividend payable following the date of death. This is because a deemed dividend can only be taken to be paid to the entity to whom the loan was made, and the deceased shareholder's legal personal representative is a different entity.
Although the view expressed in ATO ID 2002/741 relates to section 109E of the ITAA 1936 (regarding shortfalls in loan repayments), the principal also applies to section 109D of the ITAA 1936 as this section also specifies that the dividend can only be taken to be paid to the entity to whom the loan was made.
Therefore, the amount of the loans the Company made to the deceased will not be taken to be a dividend paid to the deceased on or before the date of death.
Will a dividend be payable if the debt is forgiven?
Under subsection 109F(1) of the ITAA 1936 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.
ATO ID 2012/77 provides guidance on the operation of section 109F of the ITAA 1936 specifically in respect to the effect of death. Following the grant of probate:
● section 44 of the Probate and Administration Act 1898 deems all real and personal property of the deceased (including title to the shares) to have passed to and become vested in the executor as from the death of the individual;
● the deceased's property (including title to the shares) is held absolutely by the legal personal representative for the duration of the administration of the shareholder's estate; and
● the legal personal representative immediately assumes liability to pay the deceased's debts (including the debt owed by the deceased to the private company.
However, on the date of death, the property of the deceased vests in the Public Trustee until probate is granted.
Consequently, it is only after the grant of probate that the title to the shares in the private company will be taken to have passed to the deceased's legal personal representative as at the date of death.
It follows that prior to the grant of probate, there will be no relevant shareholder for the purposes of subsection 109F(1) of the ITAA 1936.
Therefore, should the Company forgive the amalgamated loan made to the shareholder prior to the grant of probate, the Company will not be taken to have paid a dividend to the legal personal representative shareholder.
Will a dividend be payable in the event of the debt not being forgiven and probate not being granted by 30 June 20XX?
As previously mentioned, ATO ID 2002/741 provides that where a shareholder to whom a private company has made a loan dies, there can be no deemed dividend payable following the date of death. This is because a deemed dividend can only be taken to be paid to the entity to whom the loan was made, and the deceased shareholder's legal personal representative is a different entity.
Therefore, a dividend will not be payable by the Company to the deceased's legal personal representative in the event of the debt not being forgiven and probate not being granted by 30 June 20XX.