Issue
Is a loan excluded under section 109K of the Income Tax Assessment Act 1936 (ITAA 1936) from being taken to be a dividend under section 109D of the ITAA 1936 where a company, in its capacity as trustee of a discretionary trust, receives the loan from a private company?
Decision
No. A loan is not excluded under section 109K of the ITAA 1936 from being taken to be a dividend under section 109D of the ITAA 1936 where a company, in its capacity as trustee of a discretionary trust, receives the loan from a private company.
Facts
Company X and Company Y are private companies.
The Q Family Trust is a discretionary trust.
Company X owns all of the shares in Company Y. Company Y is the trustee of the Q Family Trust.
The beneficiaries of the Q Family Trust are two natural persons. The natural persons also own all of the shares in Company X.
Company X makes a loan to Company Y as trustee for the Q Family Trust on 10 April 2003. The loan was not repaid by 30 June 2003. The loan was not made under a written agreement.
Reasons for Decision
Subsection 109D(1) of the ITAA 1936 provides that a private company is taken to pay a dividend to a shareholder or their associate at the end of the private company's year of income if the private company makes a loan to the shareholder or their associate during the year which is not fully repaid by the end of the year, and Subdivision D of Division 7A of the ITAA 1936 does not apply.
The shareholders of Company X are two natural persons. Under paragraph 318(1)(d) of the ITAA 1936, the associates of a natural person include the trustee of a trust where the person benefits under the trust. Paragraph 318(6)(a) of the ITAA 1936 states that a reference to an entity benefiting under a trust means that the entity has benefited, or, is capable of benefiting under the trust. As the natural persons are persons capable of benefiting under the trust, Company Y will be an associate of the natural persons.
Subdivision D of Division 7A of the ITAA 1936 sets out loans that are not treated as dividends. Under section 109K of the ITAA 1936, a private company is not taken to pay a dividend under section 109D of the ITAA 1936 because of a loan it makes to another company. The note to section 109K of the ITAA 1936 states that this exclusion does not apply to a loan which is made to a company in its capacity as trustee, and refers to section 109ZE of the ITAA 1936.
Section 109ZE of the ITAA 1936 states that the rules in section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) about entities apply to Division 7A of the ITAA 1936. Subsection 960-100(3) of the ITAA 1997 states that a legal person can have a number of different capacities and in each of those capacities, the person is taken to be a different entity. Subsection 960-100(4) of the ITAA 1997 provides that if a provision refers to an entity of a particular kind, it refers to that entity in its capacity as that kind of entity, not to that entity in any other capacity. For example, a provision that refers to a company does not cover a company in its capacity as trustee, unless it also refers to a trustee.
Section 109K of the ITAA 1936 applies only to loans made to a company in its capacity as a company and not as trustee. In this case, Company X made the loan to Company Y in its capacity as trustee. Therefore, section 109K of the ITAA 1936 will not apply to exclude the loan from being taken to be a dividend.
Accordingly, Company X may be taken under section 109D of the ITAA 1936 to pay a dividend to Company Y as trustee of the Q Family Trust on 30 June 2003.
Amendment History
Date of Amendment Part Comment 30 November 2016 Legislative References Add "section 109D" under Income Tax Assessment Act 1936. Change "subsection 318(1)" to "paragraph 318(1)(d)" under Income Tax Assessment Act 1936. Change "subsection 318(6)" to "paragraph 318(6)(a)" under Income Tax Assessment Act 1936. Add "Subdivision D of Division 7A" under Income Tax Assessment Act 1936. Reasons for Decision Insert "of Division 7A" in paragraph 3. Delete "of Subdivision D" in paragraph 3. Date reviewed Change from "3 April 2014" to "22 November 2016".
Date of Amendment | Part | Comment
30 November 2016 | Legislative References | Add "section 109D" under Income Tax Assessment Act 1936. Change "subsection 318(1)" to "paragraph 318(1)(d)" under Income Tax Assessment Act 1936. Change "subsection 318(6)" to "paragraph 318(6)(a)" under Income Tax Assessment Act 1936. Add "Subdivision D of Division 7A" under Income Tax Assessment Act 1936.
Reasons for Decision | Insert "of Division 7A" in paragraph 3. Delete "of Subdivision D" in paragraph 3.
Date reviewed | Change from "3 April 2014" to "22 November 2016".