Issue
Is a private company taken under section 109D or section 109E of Division 7A of Part III (Division 7A) 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 before the private company's lodgment day for the income year in which the loan is made?
Decision
No. Where the criteria in section 109N of the ITAA 1936 are met, neither section 109D nor section 109E of the ITAA 1936 operate to treat an amount as a dividend for the income year in which the loan was made, even if the taxpayer makes no repayments in respect of the loan before the private company's lodgment day for that income year.
Facts
During the 2009-10 income year, a private company made an unsecured loan to the taxpayer, an individual, and the company's sole shareholder. As at the private company's lodgment day for the 2009-10 income year, no repayments had been made. The private company did not make any other loans to the taxpayer during the 2009-10 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 2009-10 year), • the loan is not fully repaid before the private company's lodgment day for that year, and • Subdivision D does not prevent the loan from being treated as a dividend.
Subdivision D of Division 7A of the ITAA 1936 contains a number of exclusions to the application of subsection 109D(1) of the ITAA 1936. 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).
Neither section 109N nor section 109E of the ITAA 1936 requires any repayment to be made before the private company's lodgment day for the year in which the loan is made.
Where the required minimum yearly repayment is not made for a subsequent year and the loan meets the definition of an 'amalgamated loan', section 109E of the ITAA 1936 may operate to treat the shortfall in the minimum yearly repayment as a dividend. (Note: ATO ID 2010/82 explains that a repayment made before the private company's lodgment day for the year in which the loan is made, is taken into account in determining whether the required minimum yearly repayment is made for the income year immediately following.)
However, where the criteria in section 109N of the ITAA 1936 are met, neither section 109D nor section 109E of the ITAA 1936 causes any amount to be treated as a deemed dividend for the income year in which the loan is made. This is regardless of whether or not the taxpayer makes any repayments to the private company in respect of the loan before the private company's lodgment day for that income year.
Amendment History
Date Part Comment 8 August 2014 Related ATO Interpretative Decisions Updated.
Date | Part | Comment
8 August 2014 | Related ATO Interpretative Decisions | Updated.