ATO ID 2011/8: Division 7A: Interest component of shortfall in minimum yearly repayment and section 109D of the ITAA 1936
Date of decision: 31 December 2010
Year of income: Year ended 30 June 2010
Business line: Private Wealth

Issue
Where a shortfall in a minimum yearly repayment gives rise to a deemed dividend under section 109E of the Income Tax Assessment Act 1936 (ITAA 1936), can a deemed dividend also arise under section 109D of the ITAA 1936 in respect of the proportion of the shortfall comprising unpaid interest?

Decision
No. Where a shortfall in a minimum yearly repayment gives rise to a deemed dividend under section 109E of the ITAA 1936, a deemed dividend does not also arise under section 109D of the ITAA 1936 in respect of the proportion of the shortfall comprising unpaid interest.

Facts
During the 2008-09 income year a private company made an unsecured loan to the taxpayer, an individual and the company's sole shareholder. The loan was made under a complying section 109N of the ITAA 1936 agreement, with a maximum term of 7 years and with interest payable equal to the benchmark interest rate for each income year. No repayment was made on the loan for the income year ended 30 June 2010 and a deemed dividend arose under section 109E of the ITAA 1936.

Reasons for decision

Legislative references: Income Tax Assessment Act 1936 section 109D subsection 109D(1) subsection 109D(3) section 109E subsection 109E(1) subsection 109E(2) subsection 109E(5) subsection 109E(6) section 109N subsection 109N(1) subsection 109N(3)
Case references: Commissioner of Taxation v Radilo Enterprises Pty Ltd [1997] FCA 22 72 FCR 300 97 ATC 4151 34 ATR 635
Related public rulings and determinations: Taxation Determination TD 2022/11
Subject references: Companies Deemed dividends Shortfalls Shareholder loans