ATO ID 2003/840: Deemed dividend: Loan to another company in its capacity as trustee of a discretionary trust - application of section 109K
Date of decision: 29 August 2003
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Is a loan excluded under section 109K of the Income Tax Assessment Act 1936 (ITAA 1936) from being taken to be a dividend under section 109D of the ITAA 1936 where a company, in its capacity as trustee of a discretionary trust, receives the loan from a private company?

Decision
No. A loan is not excluded under section 109K of the ITAA 1936 from being taken to be a dividend under section 109D of the ITAA 1936 where a company, in its capacity as trustee of a discretionary trust, receives the loan from a private company.

Facts
Company X and Company Y are private companies. The Q Family Trust is a discretionary trust. Company X owns all of the shares in Company Y. Company Y is the trustee of the Q Family Trust. The beneficiaries of the Q Family Trust are two natural persons. The natural persons also own all of the shares in Company X. Company X makes a loan to Company Y as trustee for the Q Family Trust on 10 April 2003. The loan was not repaid by 30 June 2003. The loan was not made under a written agreement.

Reasons for decision
Summary: Subsection 109D(1) of the ITAA 1936 provides that a private company is taken to pay a dividend to a shareholder or their associate at the end of the private company's year of income if the private company makes a loan to the shareholder or their associate during the year which is not fully repaid by the end of the year, and Subdivision D of Division 7A of the ITAA 1936 does not apply. The shareholders of Company X are two natural persons. Under paragraph 318(1)(d) of the ITAA 1936, the associates of a natural person include the trustee of a trust where the person benefits under the trust. Paragraph 318(6)(a) of the ITAA 1936 states that a reference to an entity benefiting under a trust means that the entity has benefited, or, is capable of benefiting under the trust. As the natural persons are persons capable of benefiting under the trust, Company Y will be an associate of the natural persons. Subdivision D of Division 7A of the ITAA 1936 sets out loans that are not treated as dividends. Under section 109K of the ITAA 1936, a private company is not taken to pay a dividend under section 109D of the ITAA 1936 because of a loan it makes to another company. The note to section 109K of the ITAA 1936 states that this exclusion does not apply to a loan which is made to a company in its capacity as trustee, and refers to section 109ZE of the ITAA 1936. Section 109ZE of the ITAA 1936 states that the rules in section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997) about entities apply to Division 7A of the ITAA 1936. Subsection 960-100(3) of the ITAA 1997 states that a legal person can have a number of different capacities and in each of those capacities, the person is taken to be a different entity. Subsection 960-100(4) of the ITAA 1997 provides that if a provision refers to an entity of a particular kind, it refers to that entity in its capacity as that kind of entity, not to that entity in any other capacity. For example, a provision that refers to a company does not cover a company in its capacity as trustee, unless it also refers to a trustee. Section 109K of the ITAA 1936 applies only to loans made to a company in its capacity as a company and not as trustee. In this case, Company X made the loan to Company Y in its capacity as trustee. Therefore, section 109K of the ITAA 1936 will not apply to exclude the loan from being taken to be a dividend. Accordingly, Company X may be taken under section 109D of the ITAA 1936 to pay a dividend to Company Y as trustee of the Q Family Trust on 30 June 2003.

Legislative references: Income Tax Assessment Act 1936 section 109D subsection 109D(1) section 109K section 109ZE paragraph 318(1)(d) paragraph 318(6)(a) Subdivision D of Division 7A
Related ATO interpretative decisions: ATO ID 2003/838 | ATO ID 2003/839
Subject references: Associate Companies Deemed dividends Shareholder loans