ATO ID 2002/741: Amalgamated Loans and executors of deceased estates
Date of decision: 26 June 2002
Year of income: 30 June 1999, 30 June 2000, 30 June 2001
Business line: Private Groups and High Wealth Individuals

Issue
Is a private company taken, under section 109E of the Income Tax Assessment Act 1936 (ITAA 1936), to have paid a dividend to the taxpayer, the executor of the deceased estate of a shareholder in the company, in respect of a loan the company made to the shareholder before he died?

Decision
No. The private company is not taken to have paid a dividend to the taxpayer, the executor of the deceased estate of the shareholder.

Facts
Under a written agreement entered into in the income year ended 30 June 1998 by the private company and one of its shareholders, the private company made a loan to that shareholder. The written agreement met the criteria concerning minimum interest rate and maximum term contained in section 109N of the ITAA 1936. The loan is an amalgamated loan for the purposes of subsection 109E(3) of the ITAA 1936. The shareholder died during the income year ended 30 June 1999, before any repayments were due to be made under the agreement. No repayments in relation to the loan were made in the 1998 to 2001 income years by either the shareholder or the executor of his deceased estate.

Reasons for decision
Summary: Subsection 109E (1) of the ITAA 1936 states: 'A private company is taken to pay a dividend to an entity at the end of one of the private company's year of income (the "current year") if: (i) the private company made an amalgamated loan to the entity in an earlier year of income...' [emphasis added] The entity to whom the private company is taken to have paid the dividend must be the same entity to whom the private company made the amalgamated loan. For subsection 109E(1) of the ITAA 1936 to apply, the private company must have made the loan to the executor of the deceased estate. Accordingly, as the private company made the loan to the shareholder, the executor of the shareholder's deceased estate is not treated as having received a deemed dividend in respect of the amalgamated loan.

Legislative references: Income Tax Assessment Act 1936 section 109E section 109N
Subject references: Private company distributions Deemed dividends Shareholder loans