Edited version of your written advice

Authorisation Number: 1051465850307

Date of advice: 11 December 2018

Ruling

Subject: Division 7A Loans

Question

Will you be taken to pay a dividend in accordance with section 109D(1) of Income Tax Assessment Act 1936 where you receive an assignment of an interest in a pre-4 December 1997 debt that is owed by an associated family trust

Answer

Yes

This ruling applies for the following period:

01/07/2018 to 30/06/2019

The scheme commences on:

1/07/2018

Relevant facts and circumstances

1. X entities are associates of each other pursuant to section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

2. Y of the entities are private companies and the Z others are trusts.

3. According to its financial accounts, one company (the assignor) has an amount receivable from one of the trusts (‘the trust’) and that amount remains outstanding.

4. As the amount receivable was provided by the company to the trust prior to 4 December 1997 and prior to the introduction of Division 7A of Part III of the ITAA 1936, the amount has not been previously treated as a deemed dividend.

5. No written contracts were executed in respect of the arrangement relating to the pre-4 December 1997 amount receivable. There have been no changes to the terms of the arrangement since 4 December 1997.

6. The debt is not statute barred.

7. The assignor proposes to assign its interest in the debt in equal proportions to XY assignee companies.

8. The assignment will happen in the 2019 income year.

9. The assignee companies will not demand payment in full by the lodgment day of the income year in which they receive the assignment.

10. No date has been fixed for when the assignee companies will call on payment from the trust.

11. The full amount of the assigned debt will be outstanding at the lodgment day of the income year in which the assignment is made.

12. If payments are not made when called, the assignee companies could issue formal demands and pursue the creditor through recovery proceedings.

13. The terms of the debt will remain the same as stated in the deed of assignment.

14. Express notice of the assignment of the debt will be provided to the trust by 30 June 2019 pursuant to section 134 of the Property Law Act 1958 (X).

15. The purpose of the assignment is to facilitate the liquidation of the assignor company which is considered to be surplus to the group’s requirements.

16. The assignment is to occur before the liquidation of the assignor company.

17. The total consideration that will be paid for the interest in the debt will be the book value of the loans. A valuer has not been engaged.

18. Each assignee company will provide ¹/₃ of the consideration in respect of their interest in the debt.

19. The loans made to date by the assignor, the assignee companies, and the trust, are only to entities controlled by related individuals.

20. It is expected that the assignee will exercise its right to receive payments against the outstanding amount from the entity previously owing the money to the assignor.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 Subdivision D

Income Tax Assessment Act 1936 Section 109D

Income Tax Assessment Act 1936 Subsection 109D(1)

Income Tax Assessment Act 1936 Subsection 109D(3)

Income Tax Assessment Act 1936 Subsection 109D(3)(b)

Income Tax Assessment Act 1936 Subsection 109D(4)

Income Tax Assessment Act 1936 Subsection 109D(5)

Income Tax Assessment Act 1936 Section 109K

Income Tax Assessment Act 1936 Section 109L

Income Tax Assessment Act 1936 Section 109M

Income Tax Assessment Act 1936 Section 109N

Income Tax Assessment Act 1936 Section 109NA

Income Tax Assessment Act 1936 Section 109NB

Property Law Act 1958 (X) Section 134

Reasons for decision

1. Under subsection 109D(1):

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

(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.

2. A 'loan' is defined for the purposes of Division 7A in subsection 109D(3) as including:

(a) an advance of money; and

(b) a provision of credit or any other form of financial accommodation; and

(c) a payment of an amount for, or on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and

(d) a transaction (whatever its terms or form) which in substance effects a loan of money.

3. Paragraph 109D(3)(b) includes within the meaning of a Division 7A loan 'a provision of credit or any other form of financial accommodation'.

4. Paragraph 96 of Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements explains what amounts to financial accommodation for the purposes of subsection 109D(3):

In the Commissioner's view, the statutory context in which the phrase appears limits what amounts to financial accommodation under this definition to:

● the supply or grant of some form of pecuniary aid or favour (as suggested by the ordinary meaning of this term - see paragraphs 90 to 92 of this Ruling);

● under a consensual arrangement (similarly to Radilo); and

● where a principal sum or equivalent is ultimately payable (similarly to Radilo).

The supply or grant of some form of pecuniary aid or favour

5. Paragraphs 98-102 of TR 2010/3 provides further explanation on when an entity is taken to provide a benefit. In summary paragraphs 101-102 of TR 2010/3 state:

In Eldersmede and Corporate Initiatives a beneficiary was taken to have provided a benefit to the trustee of a related trust directly as a result of that beneficiary's inaction. The beneficiary provided that benefit to the trustee by failing to either:

● call for payment of its UPE; or

● call for the trustee to invest the amount of that UPE at a commercial return for its (the beneficiary's) benefit.

102. The findings of the AAT and comments by the Full Federal Court indicate that there would be a similar provision of a benefit by an unrelated beneficiary not calling for payment of funds distributed to it if it has knowledge of the UPE and authorises, or with this knowledge acquiesces to, the trust's continued use of those funds for trust purposes.

6. Under section 134 of the Property Law Act 1958 (X), where the assignor makes an absolute assignment in writing of a debt of which express notice is provided to the debtor, the assignment shall be and shall be deemed to have been effectual in law to pass and transfer legal right to the debt and all legal and other remedies.

7. The assignment will be executed in writing via a deed of assignment in which the assignor will assign absolutely all of its right title and interest in the debt to you and the other Z assignee companies as tenants in common. The assignor will provide express notice to the trust of the assignment by 30 June 2019 pursuant to section 134 of the Property Law Act 1958 (X).

8. When the assignor assigns absolutely all of its right title and interest in the debt to you and provides express notice to the trust, you will have a legal right to call on payment of your interest in the debt from the trust.

9. Accordingly, by not calling for payment of your interest in the debt from the trust, you authorise, or acquiesce to, the trust's continued use of those funds for trust purposes. In allowing this to continue you provide a benefit to the trust in the form of pecuniary aid in the amount of funds owed to you from the assignment of the interest in the debt.

Under a consensual arrangement

10. The assignor and the assignee companies will consent to the assignment of the debt as signatories to the deed of assignment.

11. Whilst the trust is not a signatory to the Deed of assignment, the corporate trustee of the trust, shares common directors with each of the assignee companies and the assignor.

12. In Spellson v. George (1992) 26 NSWLR 666; [1992] NSWCA 254 the Supreme Court of New South Wales had cause to consider what would amount to the consent of a beneficiary to the actions of a trustee in the context of a claim by the beneficiary that there had been a breach of trust. In his judgment, Handley JA, observed:

Consent may take various forms. These include active encouragement or inducement, participation with or without direct financial benefit, and express consent. Consent may also be inferred from silence and lack of activity with knowledge.

13. In Re Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund and Federal Commissioner of Taxation [2012] AATA 61; 2012 ATC 10-233; (2012) 87 ATR 282 (Montgomery Wools) the AAT held that consent could be inferred where there was a common controlling mind:

85. … In Radilo Enterprises, the Full Court considered the meaning of "the provision of credit or … financial accommodation" in the context of another legislative provision and found that the provision of credit or financial accommodation "implies a consensual transaction". In the case where Mr Montgomery was the controlling mind of both Montgomery Wools and Warwick Wools and was aware of the sale of Pearl Street, the distribution of income to the MWS Fund and the proposed payment to the CBA for the benefit of the MFT rather than to the MWS Fund, the Tribunal can infer there was a consensual arrangement. It would be artificial to suggest otherwise…

87…The arrangement was consensual because it was approved by Mr Montgomery, who was the controlling mind of both trustees. It does not matter that Mr Montgomery did not specifically turn his mind to the legal effect of this or the specific nature of the transactions. He approved and intended to approve the sale and payment of the proceeds for the benefit of the MFT, knowing the MWS Fund was entitled to those proceeds

14. As there are common controlling minds between the trustee of the trust and the companies that are party to the assignment, it will be taken that the trust will have knowledge of the assignment and it will be inferred they have consented to the arrangement.

Where a principal sum or equivalent is ultimately payable

15. As per the draft deed of assignment, ‘the terms of the debt were never reduced to writing however it is understood that the debt is interest free unless otherwise agreed and repayable at the demand of the assignor’.

16. When the assignor assigns absolutely all of its right title and interest in the debt to you and provides express notice to the trust pursuant to section 134 of the Property Law Act 1958 (X), you will have a legal right to call on payment of your interest in the debt from the trust.

17. Upon execution of the deed of assignment, you will be providing pecuniary aid to the trust by not calling on a debt that is ultimately payable to you. As there are common controlling minds it will be inferred all parties have consented to the arrangement.

18. The trust is an associate of your shareholder in accordance with section 318 of the ITAA 1936. Accordingly, you will be providing financial accommodation to the trust and be taken to have made a loan to the trust for the purposes of Division 7A.

Timing of loan

19. Subsection 109D(4) sets out in which year the loan is made:

For the purposes of this Division, a loan is made to an entity at the time the amount of the loan is paid to the entity by way of loan or anything described in subsection (3) is done in relation to the entity.

20. You do not make a loan in the ordinary sense. For the purposes of Division 7A, the loan made by you is the provision of financial accommodation to the trust, being something ‘described in subsection (3)’.. The timing of the provision of financial accommodation by you to the trust will be when you receive the assignment of the interest in the debt and do not call for payment in full, being during the 2019 income year.

21. Pursuant to subsection 109D(4), for the purposes of Division 7A, you will be taken to make a loan to the trust in the 2019 income year.

22. Subsection 109D(5) deals specifically with loans made before 4 December 1997:

If the terms of a loan made before 4 December 1997 are varied on or after that day by extending the term of the loan or increasing its amount, this Division applies to the loan as if it were made on the new terms when the variation occurred.

23. Whilst the original loan was made to the trust by the assignor before 4 December 1997, subsection 109D(5) is not applicable to you. The financial accommodation that you have provided to the trust is the relevant transaction, and this loan was not made before 4 December 1997. As mentioned above, the loan made by you was made via the provision of financial accommodation which only occurs after the deed of assignment is executed and you do not demand payment in full.

Exclusions

24. Subdivision D sets out exclusions for loans that will not be treated as dividends for the purposes of subsection 109D(1). None of these exclusions apply to the loan made by you to the trust as explained below:

1. loans to other companies (section 109K);

● The loan is to a trust not a company.

2. loans that are otherwise assessable or specifically excluded from being assessable (section 109L);

● Not applicable. The amount is not otherwise assessable to the trust. Nor is it specifically excluded from being included in the trusts income outside of Division 7A.

3. loans made in the ordinary course of business on ordinary commercial terms at arm’s length (section 109M);

● Not applicable. The only loans made by the group are to related parties.

4. loans that meet criteria for minimum interest rate and maximum term (section 109N);

● The terms of the debt as stated in the deed of assignment do not meet the conditions in section 109N.

5. certain loans and distributions by liquidators (section 109NA);

● Not applicable.

6. loans that are for the purpose of funding the purchase of certain ESS interests under an employee share scheme (section 109NB).

● Not applicable.

25. You will be taken to pay a dividend under subsection 109D(1) where the debt assigned to you is not fully repaid by the lodgment day of your 2019 tax return.