ATO ID 2012/77: Income tax Division 7A: operation of section 109F of the Income Tax Assessment Act 1936 to forgiveness of amalgamated loan debt by a private company to a shareholders estate while it is in administration
Date of decision: 11 September 2012
Year of income: Year ending 30 June 2013

Issue
Does section 109F of the Income Tax Assessment Act 1936 (ITAA 1936) operate to deem a private company to have paid a dividend to a deceased's legal personal representative in circumstances where a private company is taken to have made an amalgamated loan to a shareholder who dies before the amalgamated loan is repaid, and the private company forgives the loan while the shareholder's estate is in administration?

Decision
Yes, section 109F of the ITAA 1936 operates to deem a private company to have paid a dividend to a deceased's legal personal representative in circumstances where a private company is taken to have made an amalgamated loan to a shareholder who dies before the amalgamated loan is repaid, and the private company forgives that loan while the shareholder's estate is in administration.

Facts
The individual was a resident of New South Wales. The individual was a shareholder and director of a private company. During the 2008-09 income year the private company made a loan to the shareholder. The loan was subject to a written loan agreement that satisfied the requirements of section 109N of the ITAA 1936. The shareholder made the required minimum yearly payments since the loan was made. The shareholder died solvent during the 2011-12 income year. The shareholder's will nominate an executor (legal personal representative) to administer the shareholder's estate. Before 30 June 2012, the Supreme Court of New South Wales gives the nominated legal personal representative a Grant of Probate to administer to deceased's estate. During the 2012-13 income year, during administration of the deceased's estate, the private company forgives the loan owed to it by the shareholder.

Reasons for decision
Summary: All references are to the ITAA 1936 unless otherwise indicated . For the purposes of Division 7A of Part III, an amalgamated loan is taken to have been made during an income year if a private company makes a constituent loan, or loans, to an entity during the income year which: Because the loan made by the private company to the shareholder satisfied the conditions in subsection 109E(3), it is taken to be an amalgamated loan for the purposes of Division 7A of Part III. Repayments made in respect of the loan are taken to be repayments made in relation to the amalgamated loan (subsection 109E(4)). Under subsection 109F(1) a private company is taken to pay a dividend to an entity at the end of the private company's year of income if all or part of a debt the entity owed the private company is forgiven in that year and either: If a private company forgives an amount of debt resulting from a constituent loan taken into account in working out the amount of an amalgamated loan under subsection 109E(3), the private company is taken to forgive the same amount of debt resulting from the amalgamated loan (subsection 109F(7)). Under subsection 109F(2) the amount of the dividend is equal to the amount of debt forgiven, subject to the private company's distributable surplus as calculated under section 109Y. Following the Grant of Probate of the individual's will, section 44 of the Probate and Administration Act 1898 (NSW ) deems all real and personal property of the deceased (including title to the shares) to have passed to and become vested in the executor as from the death of the individual. The deceased's property (including title to the shares) is held absolutely by the legal personal representative for the duration of the administration of the shareholder's estate ( Official Receiver In Bankruptcy v. Schultz [ 1990 ] HCA 45 ; ( 1990) 170 CLR 306 ). Following the Grant of Probate, the legal personal representative immediately assumes liability to pay the deceased's debts (including the debt owed by the deceased to the private company (the amalgamated loan)) (Certoma, GL 2010, The Law of Succession in New South Wales , 4th edn Thomson Reuters, Sydney, p. 304). As the title to the shares in the private company passed to the deceased's legal personal representative upon the death, the legal personal representative is the relevant shareholder for the purposes of paragraph 109F(1)(a). By forgiving the debt owed by the legal personal representative shareholder, the private company is taken to have paid a dividend to the legal personal representative shareholder in the 2012-13 income year.

Legislative references: Income Tax Assessment Act 1936 Division 7A section 109D section 109E subsection 109E(3) subsection 109E(4) subsection 109E(7) section 109F subsection 109F(1) Paragraph 109F(1)(a) subsection 109F(2) subsection 109F(7) subsection 109G(3A) subsection 109G(3B) section 109N section 109Y
Case references: Official Receiver In Bankruptcy v Schultz [1990] HCA 45 (1990) 170 CLR 306
Other references: Certoma, GL 2010, The Law of Succession in New South Wales, 4th edn Thomson Reuters, Sydney, p. 304
Subject references: Companies Debt forgiveness Deceased estates Deemed dividends Private companies Shareholder loans