Edited version of private advice

Authorisation Number: 1052089673616

Date of advice: 23 February 2023

Ruling

Subject: Division 7A

Question 1

Will the provision of an asset by the Company to the shareholder be a payment that will be taken to be a dividend because of the operation of sections 109CA and 109C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

XX November 20XX

Relevant facts and circumstances

The Company is considering purchasing an asset.

The shareholder of the Company the Trust.

The Company will make the asset available to the shareholder (the Trust).

The asset will be used by A and B, who are primary beneficiaries of the Trust.

A and B are trustees of the Trust.

A and B are directors of the Company.

A and B are not employees of the Company.

The Company does not pay director fees.

A and B's use of the asset will result from the Trust being the shareholder of the Company and not from them being directors of the Company.

The asset will be purchased by the Company for asset protection reasons.

All funding and operating costs will be paid for by A and B personally, including loan repayments and all operating and maintenance costs.

The Company will not claim for any expenses relating to the asset.

The Company and any other related entity will not claim GST or income tax deductions on the purchase or any future operating costs of the asset.

Relevant legislative provisions

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

Section 109C of the Income Tax Assessment Act 1936

Section 109CA of the Income Tax Assessment Act 1936

Section 109Y 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

Division 8 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 960-100 of the Income Tax Assessment Act 1997

Reasons for decision

Section 109C of the ITAA 1936 relevantly provides that 'a private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and ... the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder'.

Subsection 109CA(1) of the ITAA 1936 states that '... payment to an entity includes the provision of an asset for use by the entity'.

Subsection 960-100(1) of the Income Tax Assessment Act 1997 provides an 'entity' includes a trust, and a trustee of a trust.

For the purposes of Division 7A, section 109ZD defines associate to have the meaning given by section 318, and generally includes your relatives; a partnership that you are a partner in; a trustee of a trust that you, or your associate, are a beneficiary of; or a company that you, or your associate, control or influence.

Subsection 318(3) of the ITAA 1936 provides that an associate of a trustee includes 'any entity that benefits under the trust'. Subsection 318(6) of the ITAA 1936 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 benefitting, under the trust, either directly or through any interposed companies, partnerships or trusts'.

Paragraph 109CA(2)(a) of the ITAA 1936 relevantly provides that the time the payment is made is the time the entity first uses the asset with the permission of the provider of the asset. Where the use continues into another income year of the entity, the provision of the asset for use in the other income year is treated as a separate payment made at the start of that year (subsection 109CA(3) of the ITAA 1936).

The Company propose to buy an asset that it will make available to its shareholder, the Trust, which in turn will make the asset available to its beneficiaries. Under the arrangement, the Company will provide its shareholder (the Trust) with the use of an asset. The 'use' is the capacity to make the aset available to the beneficiaries. As such, sections 109C and 109CA of the ITAA 1936 will operate to treat the provision of the asset as a payment and a dividend to the shareholder, unless an exception in section 109CA applies.

Subsections 109CA(4) to 109CA(7A) and 109CA(9) of the ITAA 1936 provide exceptions that prevent subsection 109CA(1) of the ITAA 1936 from applying. Relevantly, subsection 109CA(5) provides that 'subsection (1) does not apply to the extent that, if the entity had incurred and paid expenditure in respect of the provision of the asset, a once only deduction would have been allowable to the entity in respect of the expenditure...'.

The Explanatory Memorandum to Tax Laws Amendment (2010 Measures No.2) Bill 2010, which introduced section 109CA of the ITAA 1936, provides that the test is 'whether the payment for the use of the asset would be deductible to the user of the asset, not whether the user would be able to deduct the amount had they purchased the asset themselves'.

Division 8 of the ITAA 1997 sets out the amounts that can be deducted from assessable income. The general deduction under section 8-1 of the ITAA 1997 provides that:

(1)  You can deduct from your assessable income any loss or outgoing to the extent that:

(a)  it is incurred in gaining or producing your assessable income, or

(b)  It is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2)  However, you cannot deduct a loss or outgoing under this section to the extent:

(a)  It is a loss or outgoing of capital, or of a capital nature, or

(b)  It is a loss or outgoing of a private or domestic nature, ...

In terms of the application of subsection 109CA(5) of the ITAA 1936 to the hypothetical expenditure of the test entity (the Trust), neither of paragraphs 8-1(1)(a) or 8-1(1)(b) of the ITAA 1997 would be satisfied meaning the hypothetical expenditure would not give rise to a deduction under section 8-1 of the ITAA 1997.

The hypothetical expenditure would also not give rise to a deduction under any other provision of the ITAA 1997.

NB: The same conclusions would be reached were the test entity instead taken to be each of A and B.

Subsection 109CA(5) of the ITAA 1936 will therefore not operate to prevent subsection 109CA(1) of the ITAA 1936 from applying to the provision of the asset by the Company to its shareholder. As such, Section 109C of the ITAA 1936 will operate to treat the Company as having paid a dividend to its shareholder (the Trust) in respect of the use of the asset. If the asset is made available to the shareholder in more than one income year, the use of the asset will be treated as a payment and dividend to the shareholder in each income year it is used.

Subsection 109CA(10) of the ITAA 1936 states that the amount of the payment is:

(a)    the amount that would have been paid for the provision of the asset by the parties dealing at arm's length; less

(b)    any consideration given for the provision of the asset by the entity.

Subsection 109CA(11) of the ITAA 1936 states that 'the amount of the payment is nil if the consideration given by the entity equals or exceeds the amount that would have been paid at arm's length for the provision of the asset.

Subsection 109Y(1) of the ITAA 1936 limits the sum of all dividends taken to be paid by a company under Division 7A of Part III of the ITAA 1936 for an income year to the company's distributable surplus for that year. If the sum of all of a company's Division 7A dividends is greater than its distributable surplus, subsection 109Y(3) of the ITAA 1936 provides the formula for calculating the amount of each dividend.