ATO ID 2010/206: Deemed dividends: written loan agreement - no repayments before the private company's lodgment day for the income year in which the loan is made
Date of decision: 2 November 2010
Year of income: Year ended 30 June 2010
Business line: Private Groups and High Wealth Individuals

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:

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
Summary: 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: 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: 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. 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.

Legislative references: Income Tax Assessment Act 1936 Division 7A section 109D subsection 109D(1) section 109N subsection 109N(1) subsection 109N(3) section 109E
Related ATO interpretative decisions: ATO ID 2003/97 | ATO ID 2010/82
Subject references: Companies Shareholder loans Private company distributions