Edited version of private advice

Authorisation Number: 1052231682732

Date of advice: 13 March 2024

Ruling

Subject: Deemed dividends

Question 1

Is there a deemed dividend to the Estate of the deceased under section 109D of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the loan paid by the Company to the deceased?

Answer

No

This ruling applies for the following period:

Income year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

1.    The Company was owned equally by two shareholders, the deceased and A.

2.    The deceased died in the 20XX income year.

3.    Before their death, the deceased borrowed money from the Company in the 20XX income year. The loan was not identified until some years later, and the loan was not repaid for several years. The loan was repaid by the deceased's estate (Estate).

4.    The deceased died before the end of the Company's 20XX income year.

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 109ZD of the Income Tax Assessment Act 1936

Section 960-100 of the Income Tax Assessment Act 1997

Reasons for decision

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).

When the loan was made, the deceased was a shareholder of the Company.

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 Commissioner 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 a loan to the deceased (a shareholder) in the 20XX income year, and no repayment was made on the loan for several years. The deceased died before the end of the Company's 20XX income year. Following the death of the deceased, the estate of the deceased held the loan. The deceased and the estate of the deceased are not the same entity.

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

As such, Division 7A of Part III of the ITAA 1936 will not operate to treat the loan paid by the Company to the deceased in the 20XX income year as a deemed dividend to the Estate.