Deemed dividends - deemed minimum yearly repayment

Where a loan agreement deems the minimum yearly repayment for the current year to be made to the company, will this constitute an amount 'paid to the private company' under paragraph 109E(1)(c) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The minimum yearly repayment deemed to be paid under the loan agreement does not constitute an amount 'paid to the private company' under paragraph 109E(1)(c) of ITAA 1936.

During the 2006-07 year of income a private company made an unsecured loan to the taxpayer, an individual and the company's sole shareholder. At the private company's lodgment day for the 2006-07 income year, the loan was not fully repaid. The private company did not make any other loans to the taxpayer during the 2006-07 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 written agreement in relation to the loan provides, amongst other things, that: • Loans made by the company to the taxpayer will be repaid by the taxpayer making a minimum yearly repayment no later than the last day of each income year which follows the income year in which the loan was made, • The taxpayer is deemed to have repaid the minimum yearly repayment at the end of the year of income where, but for such repayment, the whole or any part of the loan amount would be included in the assessable income of the taxpayer, and • The taxpayer will hold their cash at bank on trust to pay an amount equal to the minimum yearly repayment to the company and will be obliged in equity to compensate the company for the value of the minimum yearly repayment. The taxpayer will also hold all their other assets subject to a charge in equity, securing payment of that compensation.

The taxpayer did not make any repayments in respect of the loan in the 2007-08 income year.

Section 109E of the ITAA 1936 operates to treat an amount as a dividend where the minimum repayment on the loan is not made. A loan by a private company to a shareholder is an amalgamated loan for the purposes of section 109E if: • the private company makes one (or more) loans to an entity during an income year, • the loan is not fully repaid before the private company's lodgment day for the income year in which the loan is made, and • the conditions in section 109N of the ITAA 1936 concerning the loan, being under a written agreement, minimum interest rate payable, and maximum term of the loan, are satisfied.

In this case, the loan meets the definition of an amalgamated loan (see subsection 109E(3) of the ITAA 1936).

Subsections 109E(1) and 109E(2) provide that the shortfall in respect of a minimum yearly repayment is treated as a dividend at the end of the private company's current income year if certain circumstances exist. The private company must have made an amalgamated loan, the loan is not fully repaid and the full minimum yearly repayment has not been made. With regard to the last requirement paragraph 109E(1)(c) states: 'the amount (if any) paid to the private company during the current year in relation to the amalgamated loan falls short of the minimum yearly repayment of the amalgamated loan worked out under subsection (5) for the current year,... (emphasis added)

To ascertain whether the deemed repayment constitutes an amount 'paid to the private company' for the purposes of paragraph 109E(1)(c) of the ITAA 1936 it is necessary to look at the meaning of the phrase 'paid to the private company'.

The phrase 'paid to the private company' is to be given its ordinary meaning. The ordinary meaning of 'paid to the private company ' is used in the context of the repayment of loans. Accordingly, it means the repaying to the company of an amount already borrowed and/or the transfer of money from the debtor to the creditor, that is, the discharge of all or part of the debt or obligation.

Where the taxpayer does not repay an amount equal to the minimum yearly repayment by the required date, the terms of the agreement provide: • that the minimum yearly repayment amount is deemed to have been made, and • for the establishment of an equitable relationship and the giving of a charge.

This is inconsistent with the ordinary meaning of 'paid to the private company'.

Accordingly, the payment deemed to have been made in the 2007-08 income year under the terms of the agreement, does not constitute an amount 'paid to the private company' for the purposes of paragraph 109E(1)(c) of the ITAA 1936.

Date Part Comment 8 August 2014 Related ATO Interpretative Decisions Updated.

Date | Part | Comment

8 August 2014 | Related ATO Interpretative Decisions | Updated.