ATO ID 2012/61: Income Tax Division 7A: income year in which an amalgamated loan is taken to be made when written loan agreement put in place after the end of the year of income in which loan(s) made but before lodgment day
Date of decision: 10 July 2012
Year of income: Year ended 30 June 2011
Business line: Private Groups and High Wealth Individuals

Issue
If a private company makes a loan in an income year and, in respect of the loan, in the following income year (and before the relevant lodgment day) puts in place an agreement that satisfies the criteria in section 109N of the Income Tax Assessment Act 1936 (ITAA 1936), is the income year in which an amalgamated loan is taken to be made (for the purposes of section 109E of the ITAA 1936) the income year in which the complying loan agreement is put in place?

Decision
No. If a private company makes a loan in an income year and, in respect of the loan, in the following income year (and before the relevant lodgment day) puts in place an agreement that satisfies the criteria in section 109N of the ITAA 1936, the income year in which an amalgamated loan is taken to be made (for the purposes of section 109E of the ITAA 1936) is the income year in which the loan is made. The putting in place of a complying loan agreement, in respect of a loan, does not alter the date on which the loan was made.

Facts
During the 2011-12 income year, a private company (ABC Pty Ltd) made an unsecured loan to an individual taxpayer who was the company's sole shareholder. In the 2012-13 income year, but before the private company's lodgment day for the 2011-12 income year, the private company puts in place, in respect of the loan, an agreement that satisfies the criteria in subsection 109N(1) of the ITAA 1936 (a "complying loan agreement"). The putting in place of the complying loan agreement merely elucidates the terms of the agreement made in the 2011-12 income year, it does not amount to a new loan between the private company and the individual.

Reasons for decision
Summary: All references are to the ITAA 1936 unless otherwise indicated. A private company is taken to pay a dividend to an entity at the end of an income year (the current year), if an amalgamated loan made in an earlier income year is not repaid by the end of the current year, and the amount paid to the private company in relation to the amalgamated loan during the current year is less than the minimum yearly repayment worked out under subsection 109E(5) (section 109E). 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 each of which (subsection 109E(3)): Section 109N prevents a private company from being taken to pay a dividend under section 109D where, before the private company's lodgment day for the year of income (subsection 109N(1)): Such written agreement is commonly referred to as a 'complying loan agreement' or a 'section 109N loan agreement'. It has been suggested that an amalgamated loan is taken to have been made during the income year in which a private company reduces the terms of the loan to writing to satisfy the criteria in subsection 109N(1). For the purposes of Division 7A of Part III a loan is made at the time the amount of the loan is paid to the entity by way of loan or anything described in subsection 109D(3) (subsection 109D(4)). Therefore, the income year in which an amalgamated loan is made is the income year in which "the loan", to which paragraph 109N(1)(a) refers, is made. The making of a complying loan agreement may, as a matter of contract law, either: (a) merely elucidate the terms of an existing loan agreement, (b) vary the terms of an existing loan agreement, or (c) amount to the making of a new loan. Whether or not, in a particular case, the making of a complying loan agreement is a mere elucidation or variation of the terms of an existing loan, or amounts to a new loan, is a question of fact to be determined by reference to all of the circumstances. An elucidation of the terms of a contract merely expresses more accurately the original intention of the parties. By way of contrast, a variation alters the terms of the contract. Variation involves changes that do not go to the root of the contract or alter the substance of the original agreement ( British & Beningtons Ltd v. North West Cachar Tea Co Ltd [1923] AC 48). The principles relating to variation of contract are well established. In FCT v. Sara Lee Household & Body Care (Aust) Pty Ltd (2000) 201 CLR 520, the majority stated (533 [22]): When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. Their Honours went on to refer to the judgment of Taylor J in Tallerman & Co Pty Ltd v. Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 who stated (144): It is firmly established by a long line of cases ... that the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement. The result of variation is that the original contract remains in force, with only some of its terms being altered. By contrast, in circumstances where the terms of a subsequent contract are entirely inconsistent with a first contact, or go to the very root of the first contract, the first contract may be impliedly discharged by abandonment (British & Beningtons Ltd v. North West Cachar Tea Co Ltd [1923] AC 48) (see ATO ID 2012/60 which discusses the consequences where a complying loan agreement amounts to a new loan). In circumstances where the making of a complying loan agreement merely elucidates the terms of an existing loan, the amalgamated loan is taken to be made, for the purposes of Division 7A of Part III, in the income year in which the amount is paid to the entity by way of loan or anything described in subsection 109D(3). That is, in such circumstances, the putting in place of a complying loan agreement does not change the date of the loan in respect of which the agreement was made. Accordingly, as the putting in place of the complying loan agreement between ABC Pty Ltd and the individual merely elucidates the terms of an existing loan, the loan is, for the purposes of Division 7A of Part III, taken to be made in the 2011-12 income year.

Legislative references: Income Tax Assessment Act 1936 Division 7A section 109D subsection 109D(3) subsection 109D(4) section 109E subsection 109E(5) section 109N subsection 109N(1) paragraph 109N(1)(a) subsection 109N(3)
Case references: British & Beningtons Ltd v North West Cachar Tea Co Ltd [1923] AC 48
Related ATO interpretative decisions: ATO ID 2012/60
Subject references: Deemed dividends Private companies Shareholder loans