Private ruling: Division 7A of Part III of the Income Tax Assessment Act 1936
Date of advice: 31 August 2016
Published: November 2016
Ruling period: Income year ended 30 June 2009 | Income year ended 30 June 2010 | Income year ended 30 June 2011 | Income Year ended 30 June 2012 | Income year ended 30 June 2013 | Income Year ended 30 June 2014 | Income Year ended 30 June 2015 | Income Year ended 30 June 2016
Date scheme commenced: 1 July 2008

Ruling: Q1: Will the Commissioner exercise the discretion under section 109RB of the Income Tax Assessment Act 1936 (ITAA 1936) to disregard the operation of Division 7A of Part III of the ITAA 1936? | A1: Yes

Relevant facts and circumstances: The Group is comprised of a number of entities including two companies. The two companies made loans to other entities in the Group. The Group engaged a tax agent. The tax agent was instructed to manage the loans in accordance with Division 7A of Part III of the ITAA 1936. A review of the accounts of the Group identified that the tax agent had failed to manage the loans in accordance with Division 7A of Part III of the ITAA 1936. Prior to the review, the Group was unaware that the loans were not managed in accordance with Division 7A of Part III of the ITAA 1936. The relevant parties have entered into loan agreements that comply with Division 7A of Part III of the ITAA 1936. The Group have advised that the outstanding minimum yearly repayments (section 109E), and additional interest, will be paid on each loan. Division 7A has not previously operated in relation to any of the entities in the Group

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 109D, | Income Tax Assessment Act 1936 Section 109N and | Income Tax Assessment Act 1936 Section 109RB.

Reasons for decision: Summary: Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) operates to treat certain loans and other payments made by a private company to a shareholder or their associate as assessable income (unfranked dividends) of the shareholder or associate. Section 109D of the ITAA 1936 provides that where a private company makes a loan to a shareholder or their associate in an income year, and the loan is not fully repaid by the lodgement day of that income year, the loan is taken to be a dividend paid to the shareholder or their associate at the end of that income year, unless the provisions in subdivision D of Division 7A of Part III of the ITAA 1936 prevent the loan from being treated as a dividend. The Group accept that Division 7A will operate to treat the loans as deemed dividends. In circumstances where Division 7A operates with the result that a private company is taken to pay a dividend to a shareholder or their associate, subsection 109RB(2) of the ITAA 1936 provides the Commissioner with discretion to either disregard the operation of Division 7A, or allow the deemed dividend to be franked, where the operation of Division 7A arose because of an honest mistake or inadvertent omission by either the recipient, the private company, or any other entity whose conduct contributed to that result (subsection 109RB(1)). The Commissioner may exercise the discretion subject to conditions (subsection 109RB(4) of the ITAA 1936). Honest mistake or inadvertent omission A mistake in the context of Division 7A is an incorrect view or opinion or misunderstanding about how the division operates; about facts that are relevant to its operation; or about other matters that affect its operation. An omission is a failure to take action that is relevant to, or affects, the operation of Division 7A. Taxation Ruling TR 2010/8 Income tax: application of subsection 109RB(1) of the Income Tax Assessment Act 1936 requires a consideration of the following matters when determining if Division 7A operated as a result of an honest mistake or inadvertent omission: 7. In each case, it is a question of fact whether an honest mistake or inadvertent omission has occurred. All the facts and circumstances must be considered to determine whether an honest mistake or inadvertent omission occurred. … 10. In determining whether a person has made an honest mistake or an inadvertent omission, that person's actual state of mind or belief is in issue. However, the available evidence may provide an indication of the person's actual state of mind. The following circumstances are relevant to determining whether Division 7A operated because of an honest mistake or inadvertent omission: • Two companies made loans to other entities in the Group. • The Group engaged a tax agent. • The tax agent was instructed to manage the loans in accordance with Division 7A of Part III of the ITAA 1936. • A review of the accounts of the Group identified that the tax agent had failed to manage the loans in accordance with Division 7A of Part III of the ITAA 1936. • Prior to the review, the Group was unaware that the loans were not managed in accordance with Division 7A of Part III of the ITAA 1936. Based on the foregoing, the operation of Division 7A occurred because of an honest mistake or inadvertent error; the Group trusted that their tax agent would set up loans that complied with Division 7A, and that their tax agent would manage the loans in accordance with the requirements of Division 7A. Applying the factors in subsection 109RB(3) of the ITAA 1936 to determine whether the discretion should be exercised Subsection 109RB(3) of the ITAA 1936 provides that the Commissioner must have regard to the following relevant factors when making a decision on whether to exercise the discretion in subsection 109RB(2) of the ITAA 1936: (a) The circumstances that led to the mistake or omission; (b) The extent to which the recipient, the private company, or other entity whose conduct contributed to Division 7A of the ITAA 1936 operating, has taken action to correct the mistake or omission, and if so, how quickly the action was taken; (c) Whether Division 7A has operated previously in relation to the recipient, the private company, or other entity whose conduct contributed to Division 7A operating, and if so, the circumstances in which it occurred (d) Any other matters that the Commissioner considers relevant. The following circumstances are considered relevant in deciding whether the discretion should be exercised: • The Group engaged a tax agent • The tax agent was instructed to manage the loans in accordance with Division 7A of Part III of the ITAA 1936. • A review of the accounts of the Group identified that the tax agent had failed to manage the loans in accordance with Division 7A of Part III of the ITAA 1936. • Prior to the review, the Group was unaware that the loans were not managed in accordance with Division 7A of Part III of the ITAA 1936. • The relevant parties have entered into loan agreements that comply with Division 7A of Part III of the ITAA 1936. • The Group have advised that the outstanding minimum yearly repayments (section 109E), and additional interest, will be paid on each loan. • Division 7A has not previously operated in relation to any of the entities in the Group. In these circumstances, the Commissioner will exercise the discretion under subsection 109RB(2) of the ITAA 1936 and disregard the operation of Division 7A of Part III of the ITAA 1936 subject to the minimum yearly repayments required under section 109E of the ITAA 1936 being made for past years, and in future years until such time as the relevant amalgamated loans are repaid in full.