ATO ID 2011/33: Deemed dividend: No FBT on a Division 7A shareholder loan where distributable surplus is nil
Date of decision: 3 November 2010
Year of income: Year ended 31 March 2010
Business line: Superannuation and Employer Obligations

Issue
Will the paragraph (r) exclusion from the definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) preclude a loan from being a loan fringe benefit where the loan is taken to be a dividend, but the amount is reduced to nil in accordance with section 109Y of Division 7A of Part III (Division 7A) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. The paragraph (r) exclusion from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA will preclude a loan from being a loan fringe benefit where the loan is taken to be a dividend, but the amount is reduced to nil in accordance with section 109Y of the ITAA 1936.

Facts
The taxpayer is a shareholder and an employee of the private company employer. The private company lent an amount to the shareholder in respect of their employment during the 2008-09 income year which has not been fully repaid before the private company's lodgment day for the year ended 30 June 2009. The taxpayer was a shareholder at the time the loan was made. The loan is subject to Division 7A of the ITAA 1936 and is not of a type that would come within Subdivision D of Division 7A. The private company's distributable surplus is nil for the year ended 30 June 2009.

Reasons for decision
Summary: Fringe Benefits Tax (FBT) will apply to loan benefits provided to employees (as defined in subsection 16(1) of the FBTAA) that are otherwise fringe benefits. The paragraph (r) definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a 'fringe benefit' does not include: anything done in relation to a shareholder in a private company (as those terms are defined in section 6 of the Income Tax Assessment Act 1936 ), or an associate of such a shareholder, that causes (or will cause) the private company to be taken under Division 7A of Part III of that Act to pay the shareholder or associate a dividend. Under subsection 109D(1) of the ITAA 1936 an amount lent by a private company to a shareholder during the current year is taken to be a dividend for the purposes of Division 7A if the loan is not fully repaid before the private company's lodgment day for that income year, and Subdivision D of Division 7A of the ITAA 1936 does not otherwise prevent the private company from being taken to have paid a dividend to the shareholder. Under subsection 109D(1AA) of the ITAA 1936 the amount of the dividend taken to have been paid is the amount of the loan that has not been repaid before the private company's lodgment day for the current year, subject to section 109Y of the ITAA 1936. Section 109Y of the ITAA 1936 limits the total amount of dividends taken to have been paid by the private company under Division 7A of the ITAA 1936 to the company's distributable surplus as at the end of its year of income. In this case the private company has made a loan to the shareholder which is taken to be a dividend under section 109D of the ITAA 1936, and the amount of the dividend is reduced to nil because the company has a nil distributable surplus for the year ended 30 June 2009. However, the private company is still taken to pay a dividend to the shareholder under subsection 109D(1) of the ITAA 1936. It is only the amount of the dividend under subsection 109D(1AA) of the ITAA 1936 which is affected by the private company's distributable surplus. Accordingly, the paragraph (r) exclusion from the definition of 'fringe benefit' in subsection 136(1) of the FBTAA precludes the loan from being a loan fringe benefit for the year ended 31 March 2010.

Legislative references: Income Tax Assessment Act 1936 Division 7A Division 7A, Subdivision D section 6 section 109D subsection 109D(1) subsection 109D(1AA) section 109Y
Subject references: Companies Deemed dividends Dividend income Fringe benefits tax Loan fringe benefits FBT shareholder loans Private companies Private company distributions Shareholder loans