Issue
Is a private company taken under section 109D of the Income Tax Assessment Act 1936 (ITAA 1936) to pay a dividend in the income year in which a loan to a shareholder was made where: • the criteria in section 109N of the ITAA 1936 in relation to the loan concerning written agreement, minimum interest rate and maximum term are satisfied, but • the taxpayer does not make any repayments in respect of the loan in the income year in which the loan is made?
Decision
No. Where the criteria in section 109N are met section 109D of the ITAA 1936 does not apply, even if the taxpayers makes no repayments in respect of the loan in the year the loan is made.
Facts
During the 2000-01 income year, a private company made an unsecured loan to the taxpayer, an individual and the company's sole shareholder. As at 30 June 2001, the loan was not fully repaid. The private company did not make any other loans to the taxpayer during the 2000-01 income year.
The loan was made under a written agreement, with a maximum term of 7 years and with a minimum rate of interest payable equal to the benchmark interest rate for the year.
The loan from the private company to the taxpayer satisfies the requirements of section 109N of the ITAA 1936.
Reasons for Decision
A private company is taken to pay a dividend under subsection 109D(1) of the ITAA 1936 at the end of its income year if: • the private company makes a loan to a shareholder during the current year (in this case, the 2000 - 01 year), • the loan is not fully repaid by the end of that year, and • Subdivision D does not prevent the loan from being treated as a dividend.
Subdivision D of Division 7A contains a number of exclusions to the application of subsection 109D(1). Section 109N of Subdivision D prevents a private company from being taken to pay a dividend where: • the loan is made under a written agreement and the rate of interest payable on the loan for the income year after the year in which the loan is made, equals or exceeds the benchmark interest rate for the year, and • the term of the loan does not exceed the maximum term, which is seven years in the case of unsecured loans. (Refer to subsections 109N(1) and 109N(3) of the ITAA 1936.), and • Section 109N does not require that a minimum yearly repayment to be made in the year in which the loan is made.
Where a minimum yearly repayment is not made in a subsequent year and the loan meets the definition of an 'amalgamated loan', section 109E of the ITAA 1936 may operate to treat the loan made in the previous year as a dividend.
However, where the criteria in section 109N are met, section 109D does not apply, even if the taxpayer makes no repayments in respect of the loan in the year the loan is made.