Edited version of private advice

Authorisation Number: 1051931155108

Date of advice: 10 December 2021

Ruling

Subject: Deemed dividends

Question 1

Is there a deemed dividend to the deceased or the deceased's estate under sections 109D or 109E of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to loans paid by the Company to the deceased in 20XY?

Answer

No.

Question 2

Is there a deemed dividend to the deceased under sections 109D or 109E of the ITAA 1936 in relation to the loan paid by the Company to the deceased in 20XX?

Answer

Yes.

Question 3

If corrective action is required in respect of the 20XY loans, and the executor of the deceased's estate makes the estate of the deceased presently entitled to all income of the Trust in the 20XY or later years, will section 97 of the ITAA 1936 apply to the deceased's estate and not section 99 or 99A of the ITAA 1936?

Answer

Not applicable.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company has one issued share which was held by the deceased beneficially for the Trust. The deceased was the sole director of the Company.

The deceased was the trustee of the Trust. The Trust is a discretionary trust and the deceased was a discretionary beneficiary of the trust.

The Trust made loans to the deceased in 20XX and 20XY. The loans were not repaid.

There are no loan agreements for the loans.

The deceased died in an accident in the 20XY income year. The death was unexpected.

The deceased died before the end of the company's income year.

The circumstances of the death meant that there was a significant delay in the administration of the deceased's estate.

The executor of the Deceased's estate was ordered to administer the deceased's estate.

Relevant legislative provisions

Division 7A of Part III of the Income Tax Assessment Act 1936

Section 109D of the Income Tax Assessment Act 1936

Section 109E of the Income Tax Assessment Act 1936

Section 109RB of the Income Tax Assessment Act 1936

Section 109ZD of the Income Tax Assessment Act 1936

Section 318 of the Income Tax Assessment Act 1936

Section 960-100 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Detailed reasoning

Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) operates to treat certain loans and other payments made by a private company to a shareholder or their associate as assessable income (unfranked dividends) of the shareholder or associate.

Relevantly, subsection 109D(1) of the ITAA 1936 states that 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:

•         the private company makes a loan to the entity during the current income year (paragraph (a)), and

•         the loan is not fully repaid before the lodgement day for the current year (paragraph (b)), and

•         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 (paragraph (c)), and

•         the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made (subparagraph(d)(i)).

An entity includes an individual and a trust (section 109ZD of the ITAA 1936 and section 960-100 of the Income Tax Assessment Act 1997).

Paragraph 318(3)(a) of the ITAA 1936 sets out when an individual is an associate of a trust, and states that an entity that benefits under a trust is an associate of the trustee of the trust. Paragraph 318(6)(a) states that a reference to an entity benefiting under a trust is a reference to the entity benefiting, or being capable (whether by the exercise of a power of appointment or otherwise) of benefiting, under the trust, either directly or through any interposed companies, partnerships or trusts.

When the loan was made, the deceased was a discretionary beneficiary of the Trust, and was capable of benefiting under that trust. The deceased was an associate of the Trust when the loan was made.

For section 109D of the ITAA 1936 to apply, the entity that receives the loan from the private company and the entity deemed to be paid a dividend from the private company must be the same entity. The deemed dividend is taken to be paid at the end of the Company's income year (30 June). In ATO Interpretative Decision ATO ID 2002/741 Income Tax Amalgamated loans and executors of deceased estates the Commissioners considered whether section 109E of the ITAA 1936 would apply to treat a loan paid by a private company to an individual (who subsequently dies) as a deemed dividend to the estate of the deceased individual, and decides the section does not apply because the deceased individual and the estate of the deceased individual are not the same entity. The same reasoning can be applied in the case of section 109D of the ITAA 1936.

In the current circumstances, the Company made loans to the deceased (an associate of the shareholder) in the 20XY income year, no repayments were made on the loan, and there was no loan agreement(s) in place for the loans. The deceased died before the end of the company's income year. Following the death of the deceased, the executor of the deceased's estate was ordered to administer the deceased's estate. The deceased and the estate of the deceased are not the same entity.

As the deceased (recipient of the loans) died before the end of the year in which the loans were made, section 109D of the ITAA 1936 cannot operate to treat the loan paid to the deceased by the Company as a deemed dividend. Further, 109D cannot operate to treat the estate of the deceased as having received deemed dividends from the Company in relation to the 20XY loans as the deceased's estate was not paid loans in that income year.

Section 109E of the ITAA 1936 only applies where a company makes an amalgamated loan. To be an amalgamated loan, a loan must comply with the requirements in section 109N of the ITAA 1936, including that there is a written loan agreement. There is no loan agreement(s) for the 20XY loans and section 109E of the ITAA 1936 does not apply.

Division 7A of Part III of the ITAA 1936 will not operate to treat the 20XY loans paid by the Company to the deceased as deemed dividends.

Question 2

Detailed reasoning

Refer to question 1 for the relevant legislative requirements.

In the current circumstances, the Company loaned the deceased (an associate of the shareholder in the Company) money in the 20XX income year, the deceased did not repay the loan, and there was no loan agreement in place for the loan.

As there was a loan paid by a private company to an associate of a shareholder in the private company, and the loan was not repaid by the lodgement day for the 20XX income year, section 109D of the ITAA 1936 will operate to treat the loan as a deemed dividend.

Section 109E of the ITAA 1936 only applies where a company makes an amalgamated loan. To be an amalgamated loan, a loan must comply with the requirements in section 109N of the ITAA 1936, including that there is a written loan agreement. There is no loan agreement for the 20XX loan and section 109E of the ITAA 1936 does not apply.

Division 7A of Part III of the ITAA 1936 will operate to treat the 20XX loan paid by the Company to the deceased as a deemed dividend, unless the Commissioner exercises the discretion in section 109RB of the ITAA 1936 to disregard the operation of Division 7A.