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Edited version of private advice
Authorisation Number: 1051618848959
Date of advice: 10 December 2019
Ruling
Subject: Section 109L of the ITAA 1936
Question
Will the payment by the Company pursuant to section 152-125 of the Income Tax Assessment Act 1997 (ITAA 1997) override Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) so that the payment by the Company will not be included in assessable income as a loan or payment under Division 7A?
Answer
Yes
This ruling applies for the following period
1 July 2019 to 30 June 2020
The scheme commences on:
1 July 2019
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.
The Company is a private company.
The Company will sell business assets that it has owned for more than 15 years. It will make a capital gain on the disposal(s).
The Company satisfies all applicable conditions for, and will apply, the Small Business 15 year exemption.
The Company will make a payment of the proceeds from the sale of the business assets to its shareholders/significant individuals pursuant to section 152-125 of the ITAA 1997 and will treat the payment of the exempt income as an exempt cash withdrawal in the hands of its shareholders/significant individuals.
Assumptions
The Company satisfies all requirements specified in subsection 152-125(1) of the ITAA 1997.
The payment by the Company to its shareholders/significant individuals is less than or equal to the limit in subsection 152-125(2) of the ITAA 1997.
Relevant legislative provisions
Income Tax Assessment Act 1936 subsection 44(1)
Income Tax Assessment Act 1997 Subdivision 152-B
Income Tax Assessment Act 1997 section 152-125
Income Tax Assessment Act 1936 Division 7A
Income Tax Assessment Act 1936 section 109L
Reasons for decision
Summary
The payment by the Company will not be included in assessable income as a loan or a payment under Division 7A of the ITAA 1936.
Detailed reasoning
Under Division 7A of the ITAA 1936, amounts paid, lent or forgiven by a private company to shareholders or to their associates are treated as dividends (and will be assessable to the shareholder or associate pursuant to subsection 44(1) of the ITAA 1936) unless they come within specified exclusions.
A specified exclusion is provided in section 109L of the ITAA 1936 whereby certain payments and loans will not be treated as dividends. In particular, subsection 109L(2) states:
SECTION 109L CERTAIN PAYMENTS AND LOANS NOT TREATED AS DIVIDENDS
109L(1) ...
109L(2) [Where exclusion due to this Act}
In addition, a private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan that the private company made to an entity to the extent that a provision of this Act (other than this Division) has the effect that the payment or loan is not included in the entity's assessable income even though it would otherwise be included.
Subsection 109L(2) of the ITAA 1936 is designed to ensure that an amount, that is excluded from assessable income under a specific provision of the Act, is not assessed due to the operation of section 109C (payments) and section 109D (loans) in Division 7A of the ITAA 1936.
Subsection 109L(2) of the ITAA 1936 refers to 'a provision of this Act'. As stated in subsection 6(1) of the ITAA 1936:
this Act includes:
(a) the Income Tax Assessment Act 1997; and ...
As a result of the definition in subsection 6(1) of the ITAA 1936, subsection 109L(2) of the ITAA 1936 will also apply where the provision of the Act that excludes a payment or loan from assessable income is a provision in the ITAA 1997.
Pursuant to Subdivision 152-B of the ITAA 1997, a CGT small business entity can disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met. Further, if the company makes payments to its CGT concession stakeholders that are attributable to the disregarded amount, the payments will not be taken into account in determining the taxable income of the company or recipient.
Section 152-125 of the ITAA 1997 specifically provides an exemption for payments made by a company to its CGT concession stakeholders from a CGT event covered by Subdivision 152-B of the ITAA 1997. Subsection 152-125(3) provides that if a Company makes a payment that satisfies the requirements specified in subsection 152-125(1) then, to the extent the payment is less than or equal to the limit calculated in subsection 152-125(2), the payment will not be a dividend and will not be a frankable distribution.
For the purposes of this ruling it is assumed that the Company satisfies all applicable requirements specified in subsection 152-125(1) of the ITAA 1997 and that the payment by the Company to its CGT concession stakeholder(s) is less than or equal to the limit in subsection 152-125(2). As a result, the payment by the Company pursuant to section 152-125 will not be a dividend and will not be a frankable distribution, as stated in subsection 152-125(3).
Given that section 152-125 of the ITAA 1997 will specifically exclude the payment by the Company from assessable income, the payment will not be assessed under Division 7A of the ITAA 1936 because subsection 109L(2) of the ITAA 1936 specifically excludes the payment from being a loan or a payment to which Division 7A applies.