ATO ID 2005/298: Division 7A: multiple trustee loans and section 109XB
Date of decision: 7 October 2005
Year of income: Year ended 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Can section 109XB of the Income Tax Assessment Act 1936 (ITAA 1936) deem loans made by a trustee to different shareholders (or associates) of a beneficiary private company with unpaid present entitlements (UPEs) as an assessable amount where any loans equal to the amount of the UPE are neither repaid nor converted into a complying loan agreement by the 'lodgment day'?

Decision
Yes. Where a trustee makes loans to different shareholders (or associates) of a beneficiary private company that has a UPE, any loans neither repaid nor converted into a complying loan agreement by the 'lodgment day' may give rise to an assessable amount under section 109XB of the ITAA 1936.

Facts
A private company is a beneficiary of a trust which has a UPE to net income of $100,000 as at the 'lodgment day'. During the income year, the trustee made five $100,000 loans to different shareholders of the company. One of the loans was converted into a complying loan agreement by the 'lodgment day'. The remaining loans ( other loans ) are not excluded loans captured under Subdivision D of Division 7A to Part III of the ITAA 1936 and were not fully repaid by the 'lodgment day'. There is no reduction under subsection 109XA(4) of the ITAA 1936 in respect of any of the loans for the purposes of applying section 109XB of the ITAA 1936.

Reasons for decision
Summary: Subdivision EA of Division 7A of the ITAA 1936 deems certain payments, loans or debt forgiveness made by a trustee of a trust estate to a shareholder (or an associate of the shareholder) of a private company as a dividend where the private company: All references to the 'lodgment day' mean the earlier of: With respect to loans made by trustees to private company beneficiaries, subsection 109XA(2) of the ITAA 1936 provides that: As subsection 109XA(2) of the ITAA 1936 refers to 'a loan', it is triggered in respect of each separate loan. Further, this provision operates despite other loans being made by the trustee in the income year even where those loans have been repaid or converted into a complying loan under section 109N of the ITAA 1936 by the 'lodgment day'. Section 109XB of the ITAA 1936 provides that: Similarly to the application of subsection 109XA(2) of the ITAA 1936, section 109XB of the ITAA 1936 applies to each 'actual transaction'. Therefore, it will operate with respect to each loan. Section 109D of the ITAA 1936 provides that: Relevantly here, the loan that has been converted to a complying loan agreement will not give rise to an assessable amount under section 109XB of the ITAA 1936 and will not be deemed to be a dividend pursuant to section 109D of the ITAA 1936. The other loans were not repaid by the lodgment day and were not converted into complying loans. Therefore, the other loans will be deemed to be dividends under section 109D of the ITAA 1936. Further, section 109XB of the ITAA 1936 will give rise to assessable amounts with respect to the other loans.

Legislative references: Income Tax Assessment Act 1936 Part III Division 7A Subdivision D Subdivision EA section 109D paragraph 109D(1)(b) paragraph 109D(1)(c) section 109N section 109XA subsection 109XA(2) subsection 109XA(4) section 109XB subsection 109XB(2) section 109Y
Related ATO interpretative decisions: ATO ID 2005/297 | ATO ID 2005/299
Subject references: Borrowings and loans Deemed dividends Trusts Private companies