Edited version of your written advice

Authorisation Number: 1051292396476

Date of advice: 6 November 2017

Ruling

Subject: Administrative penalty

Question 1

Will the Company be liable for an administrative penalty under subsection 284-75(1) of Schedule 1 of the Tax Administration Act 1953 (TAA 1953) on the interest component of proposed minimum yearly catch-up loan repayments made by the Shareholder, when the Commissioner exercises his discretion under section 109RB of the Income tax Assessment Act 1936 (ITAA 1936)?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 2015

Income year ending 30 June 2016

Income year ending 30 June 2017

Income year ending 30 June 2018

Income year ending 30 June 2019

The scheme commences on:

1 July 2014

Relevant facts and circumstances

● All further legislative references are to the TAA 1953, unless otherwise stated.

The Shareholder is one of two shareholders of the Company. The other shareholder is the Taxpayer’s spouse. Until the year ended 30 June 2015, the Company carried on the Business. In the year ended 30 June 2015 the Company sold the Business.

During the year ended 30 June 2015 a loan was made by the Company to the Shareholder. The loan was not repaid nor put on commercial terms complying with section 109N of the ITAA 1936, by the Company’s lodgement date for the year. Rather, minimum yearly repayments have been less than what was required.

The loan has always been disclosed in the Company’s books of account.

At all relevant times throughout the relevant period, a registered tax agent was engaged as the Advisor (The first Advisor). The first Advisor indicated that the Company could lend the money to the Shareholder without consequence, and no mention was made of the requirement for a written loan agreement complying with section 109N of the ITAA 1936.

The Shareholder relied on this professional advice.

Subsequently, on seeking the services of another Advisor (the second Advisor) for an unrelated issue, the second Advisor discovered that the loan between the Company and the Shareholder would attract the operation of Division 7A of the ITAA 1936.

The Shareholder engaged the second Advisor who has put in place the Loan Agreement, which complies with section 109N of the ITAA 1936. The loan Agreement has an effective date of 30 June 2015. A copy of the Loan Agreement was provided.

The Shareholder has not made “catch-up payments” in the amount of the minimum yearly repayments under section 109E of the ITAA 1936. The Shareholder has committed to doing this, for example, in circumstances where the exercise of the Commissioner’s discretion is made, and such discretion is subject to “catch-up payments” being made.

There is a reasonable prospect that the Shareholder will be able to repay the loan.

A schedule setting out estimations of the catch-up payments required, the interest and capital components, and the tax payable by the Company (with Shortfall interest Charge) was also provided.

The Shareholder has made a voluntary disclosure within a relatively short period of time between the identification of the mistake or omission and the Commissioner being notified.

The Commissioner under separate notice of private ruling issued to the Shareholder has exercised his discretion under paragraph 109RB(2)(a) of the ITAA 1936 to disregard a dividend deemed paid by the Company to the Shareholder, provided corrective action is taken to make catch-up loan repayments (paragraph 109RB(4)(a)).

Relevant legislative provisions

Income Tax Assessment Act 1936 (ITAA 1936) Section 109E

Income Tax Assessment Act 1936 (ITAA 1936) Section 109N

Income Tax Assessment Act 1936 (ITAA 1936), Section 109RB

Income Tax Assessment Act 1936 (ITAA 1936), Paragraph 109RB(2)(a)

Income Tax Assessment Act 1936 (ITAA 1936), Paragraph 109RB(4)(a)

Taxation Administration Act 1953 (TAA 1953), Subsection 284-75(1)

Taxation Administration Act 1953 (TAA 1953), Subsection 284-80(1) Item 1

Reasons for decision

Subdivision 284-B imposes administrative penalties for certain behaviour in relation to statements made to the Commissioner, and sets out the method for calculating such penalties.

Section 284-75 Liability to penalty

Subsection 284-75(1) provides:

‘You are liable to an administrative penalty if:

(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a *taxation law (other than the *Excise Acts); and

(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.

Note: This section applies to a statement made by your agent as if it had been made by you: see section 284-25’.

If all the conditions in subsection 284-75(1) are satisfied, liability to an administrative penalty arises.

Practice Statement Law Administration PS LA 2012/5 (PS LA 2012/5) contains the Commissioner’s guidance in terms of the administration of penalties for making false or misleading statements that result in shortfall amounts.

Paragraph 16 of PSLA 2012/5 provides that a statement is anything disclosed for a purpose connected with a taxation law to the Commissioner or to another person exercising powers or performing functions under a taxation law.

Paragraph 20 of PS LA 2012/5 provides that a statement may also be made if an entity fails to include information in a document or approved form when required to do so; the entity will be taken to have made a statement by omission.

Paragraph 21 of PS LA 2012/5 explains that a statement is false, because of something contained in the statement, or because something is omitted from the statement. Paragraph 22 of PS LA 2012/5 further explains that a statement is misleading if it creates a false impression.

Paragraph 23 of PS LA 2012/5 sets out that a material particular is something that is likely to affect a decision regarding the calculation of an entity’s tax-related liability or entitlement to a credit or payment; an inconsequential statement which does not affect an entity’s tax position will not be a material particular in relation to penalties for false or misleading statements that result in a shortfall amount. Most of the information provided in a tax return or activity statement will constitute a material particular.

Paragraph 41 of Practice Statement Law Administration PS LA 2012/4 provides that the materiality of the statement is to be determined at the time it is made, and paragraph 24 of PS LA 2012/5 further reinforces that it is the nature of the statement at the time that it was made that is relevant.

The circumstances that give rise to a shortfall amount are listed in section 284-80. Item 1 of subsection 284-80(1) provides that a shortfall amount exists if a tax-related liability, worked out on the basis of the statement is less than it would be if the statement were not false or misleading.

In the present case, the Company did not actually receive interest income in relation to the proposed minimum yearly catch-up payments made by the Shareholder. The catch-up payments will be made to the Company only after the Commissioner exercises his discretion under section 109RB of the ITAA 1936. Accordingly, its tax-related liability was worked out on the basis that there was no interest to declare specific to the complying section 109N (of the ITAA 1936) loan. In turn, no shortfall penalty has arisen for the purposes of subsection 284-75(1).

Decision

The Company has not made a false or misleading statement in a material particular concerning the omission of interest income in its income tax return, and is therefore not liable to an administrative penalty under subsection 284-75(1).