Division 7A: multiple trustee loans and subsection 109XA(4)

Where in an income year, a trustee makes loans to different shareholders (or associates) of a private company beneficiary with unpaid present entitlement, do any of the loans give rise to 'previous transactions' for the purposes of applying subsection 109XA(4) of Subdivision EA of Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) in that same income year?

No. Where in an income year, a trustee makes loans to different shareholders (or associates) of a private company beneficiary with unpaid present entitlement, none of the loans give rise to 'previous transactions' for the purposes of applying subsection 109XA(4) of the ITAA 1936 in that same income year.

For the income year, a private company is a beneficiary of a trust which has unpaid present entitlement to net income of $100,000 as at the earlier of the due date for lodgement and date of lodgement of the trust's income tax return for that income year.

During the income year, the trustee made five $100,000 loans to different shareholders of the private company. None of the five loans were repaid or put on a commercial footing by the 'lodgement day' or otherwise constituted an excluded loan because of Subdivision D of Division 7A of Part III of the ITAA 1936.

No amount has been: • taken to be a loan because of the previous applications of section 109UB of the ITAA 1936 in relation to the unpaid present entitlement; or • included in an entity's assessable income because of the application of Subdivision EA of Division 7A of Part III of the ITAA 1936 in an earlier income year, in relation to the unpaid present entitlement.

Subdivision EA of Division 7A of Part III of the ITAA 1936 came into effect from 12 December 2002 and replaced section 109UB of the ITAA 1936.

Broadly speaking, Subdivision EA of the ITAA 1936 deems certain payments, loans or forgiven debts by a trustee of a trust estate to a shareholder (or associate) of a private company to be included in the shareholder's (or associate's) assessable income as if they were a dividend where the private company is presently entitled to an amount from the net income of the trust estate and that amount has not been fully paid out by the 'lodgement day'.

The 'lodgement day' is the earlier of the due date for lodgement and date of lodgement of the trust's tax return for the income year in which the payment, loan or debt forgiveness occurs.

Subsection 109XA(2) of the ITAA 1936 is the provision that applies to trustee loans. It causes section 109XB of the ITAA 1936 to apply where: a trustee makes a loan (the 'actual transaction') to a shareholder or an associate of a shareholder of a private company (except a shareholder or associate that is a company); and (i) the company is presently entitled to an amount from the net income of the trust estate at the time the loan takes place and that amount has not been paid to the company before the 'lodgement day'; or (ii) the company becomes presently entitled to an amount from the net income of the trust estate after the loan takes place but before the 'lodgement day' and the whole of the amount has not been paid to the company before the 'lodgement day'.

The amount of the 'actual transaction' to which section 109XB of the ITAA 1936 applies may be reduced by subsection 109XA(4) of the ITAA 1936 which limits the amount of the 'actual transaction' to the unpaid present entitlement, and as applicable, reduces it further by the sum of: • amounts taken to be loans in relation to the unpaid present entitlement by previous applications of section 109UB of the ITAA 1936; and • amounts included in an entity's assessable income because of previous applications of Subdivision EA of the ITAA 1936 in relation to the unpaid present entitlement.

Where a trustee makes one or more loans in an income year, the point in time when subsection 109XA(2) of the ITAA 1936 is triggered, and therefore when it may be said there is an application of Subdivision EA of the ITAA 1936, is when it may be ascertained the unpaid present entitlement has not been fully paid out. That point in time will be the same for each loan as it will be at the conclusion of 'lodgement day' that the matter may be decided. This means that it cannot be said in respect of any of the loans that one has triggered Subdivision EA before another and therefore subsection 109XA(4) of the ITAA 1936 cannot operate to reduce any particular loan by reason of Subdivision EA having already applied to another loan in the same income year.

Therefore, in the circumstances here, none of the trustee loans made in the income year cause a reduction in the amount of the 'actual transaction' in respect of any of the other loans for the purposes of applying section 109XB of the ITAA 1936. Further, the absence in an earlier income year of an application from either Subdivision EA or section 109UB of the ITAA 1936, in relation to the unpaid present entitlement, means there is no operation from subsection 109XA(4) of the ITAA 1936 to reduce the amounts of the respective 'actual transactions'. This means in each case that section 109XB of the ITAA 1936 may cause an amount to be included in assessable income of the applicable shareholder subject to the private company's distributable surplus.