ATO ID 2003/97: Deemed dividends - deemed minimum yearly repayment
Date of decision: 4 December 2001
Business line: Private Groups and High Wealth Individuals

Issue
Where a loan agreement deems the minimum yearly repayment for the current year to be made to the company, will this constitute an amount 'paid to the private company' under paragraph 109E(1)(c) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. The minimum yearly repayment deemed to be paid under the loan agreement does not constitute an amount 'paid to the private company' under paragraph 109E(1)(c) of ITAA 1936.

Facts
During the 2006-07 year of income a private company made an unsecured loan to the taxpayer, an individual and the company's sole shareholder. At the private company's lodgment day for the 2006-07 income year, the loan was not fully repaid. The private company did not make any other loans to the taxpayer during the 2006-07 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 written agreement in relation to the loan provides, amongst other things, that: The taxpayer did not make any repayments in respect of the loan in the 2007-08 income year.

Reasons for decision
Summary: Section 109E of the ITAA 1936 operates to treat an amount as a dividend where the minimum repayment on the loan is not made. A loan by a private company to a shareholder is an amalgamated loan for the purposes of section 109E if: In this case, the loan meets the definition of an amalgamated loan (see subsection 109E(3) of the ITAA 1936). Subsections 109E(1) and 109E(2) provide that the shortfall in respect of a minimum yearly repayment is treated as a dividend at the end of the private company's current income year if certain circumstances exist. The private company must have made an amalgamated loan, the loan is not fully repaid and the full minimum yearly repayment has not been made. With regard to the last requirement paragraph 109E(1)(c) states: 'the amount (if any) paid to the private company during the current year in relation to the amalgamated loan falls short of the minimum yearly repayment of the amalgamated loan worked out under subsection (5) for the current year,... (emphasis added) To ascertain whether the deemed repayment constitutes an amount 'paid to the private company' for the purposes of paragraph 109E(1)(c) of the ITAA 1936 it is necessary to look at the meaning of the phrase 'paid to the private company'. The phrase 'paid to the private company' is to be given its ordinary meaning. The ordinary meaning of 'paid to the private company ' is used in the context of the repayment of loans. Accordingly, it means the repaying to the company of an amount already borrowed and/or the transfer of money from the debtor to the creditor, that is, the discharge of all or part of the debt or obligation. Where the taxpayer does not repay an amount equal to the minimum yearly repayment by the required date, the terms of the agreement provide: This is inconsistent with the ordinary meaning of 'paid to the private company'. Accordingly, the payment deemed to have been made in the 2007-08 income year under the terms of the agreement, does not constitute an amount 'paid to the private company' for the purposes of paragraph 109E(1)(c) of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 section 109E subsection 109E(1) paragraph 109E(1)(c) subsection 109E(2) subsection 109E(3) section 109N
Related ATO interpretative decisions: ATO ID 2010/206
Subject references: Companies Shareholder loans Private company distributions