ATO ID 2003/812: Division 7A: Partly paid shares issued to a private company shareholder
Date of decision: 15 July 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Is a private company taken under subsection 109D(1) of the Income Tax Assessment Act 1936 (ITAA 1936) to have paid a dividend to the shareholder in relation to partly paid shares issued during the 2001-02 income year, upon which no calls have been made?

Decision
No. The partly paid shares, upon which no calls have been made, are not considered to be a 'loan' and so the private company is not taken under subsection 109D(1) of the ITAA 1936, to have paid a dividend to the shareholder as at 30 June 2002.

Facts
During the 2001-02 income year, a private company issued shares to a director shareholder. The total issue price was $5,000 and the shares were partly paid by the shareholder on issue to the amount of $1,000. The company did not make any calls on the shares during the 2001-02 income year.

Reasons for decision
Summary: A private company is taken under subsection 109D(1) of the ITAA 1936 to pay a dividend at the end of its income year if the private company makes a loan to a shareholder during the income year, the loan is not fully repaid by the end of that income year, and subdivision D of Division 7A of Part III of the ITAA 1936 does not prevent the private company from being taken to pay a dividend. Subsection 109D(3) of the ITAA 1936 defines a 'loan', for the purposes of Division 7A, to include an advance of money, a provision of credit or any other form of financial accommodation, or a transaction which in substance effects a loan of money. The shareholder in this case is liable under subsection 254M(1) and section 516 of the Corporations Act 2001 to pay calls on the partly paid shares up to the unpaid amount of the total issue price of the shares. However, the shareholder is not liable to pay this amount until the directors make a call or the company is wound up. Neither event has happened during the 2001-02 income year. As such, the shareholder does not owe the private company any money and the transaction cannot be described as a 'loan' as defined by subsection 109D(3) of the ITAA 1936. Therefore, the private company is not taken under subsection 109D(1) of the ITAA 1936 to have paid the shareholder a dividend as at 30 June 2002.

Legislative references: Income Tax Assessment Act 1936 subsection 109D(1) subsection 109D(3)
Subject references: Deemed dividends Private companies Shareholder loans Shares