Private ruling: FBT - 109D deemed dividend
Date of advice: 11 March 2026
Published: 4 May 2026
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the non-recourse loan from Company A to Company B be treated as a dividend in the hands of Company B at the end of FYXXXX under section 109D of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No. Issue 2 | Q2: Will Company A pay Fringe Benefits Tax (FBT) on the non-recourse loan from Company A to Company B? | A2: No.

Relevant facts and circumstances: Background Company A is a proprietary limited company. There are XXXX shares in Company A on issue in total. The shareholders of Company A are currently as follows: a) Person A XXXXX ordinary shares, Majority shareholder b) Person B (employed part time by Company C)- XXXXX ordinary shares; c) Person C (former employee of Company C)- XXXXX ordinary shares; d) Person D (former employee of Company D)- XXXXX ordinary shares; and e) Person E (employed by Company C)- XXXXX ordinary shares In addition, Person A owns 1 'X' class share. Acquisition by Executive of shares in Company A Persons B, C, D and E were part of the Executive team and acquired their shares in Company A pursuant to an arrangement whereby Company A advanced funds to them on a non-recourse basis. Person B and C's exit/Company B's acquisition Person B and C have recently retired from their employment and will dispose of their shares as a consequence of their retirement. Company B will be incorporated and will acquire Person B and C's shares. The shareholders of Company B will be Person A's three adult children (Persons F, G and H) in equal shares, they will also be the directors of Company B. Persons F and G are the directors of the following group entities: a) Company A b) Company C c) Company D d) Company E e) Company F f) Company G Persons F, G and H are or have been employees of group entities in the following roles: a) Person F, as part time Chair, represents the family shareholding interest at monthly management meetings b) Person G is currently a part time xxxx (was previously manager of xxxx of the group but another person now occupies that role). Person G also represents the family shareholding interest at monthly management meetings. c) Person H is a part time assistant standby supervisor None of Persons F, G and H have taken on the duties of the retired Persons C and D and none of them are in full time operational roles within the executive team or wider management running the business day to day including strategic direction. Company B will buy Person C and D's shares for the same amount for which they purchased their shares. The sale proceeds will be applied by Person C and D to repay in full the loans made to them by Company A (ie there will be no debt forgiveness required) and Persons C and D will retain the balance on account of their equity. Company B will fund the purchase by borrowing the full amount from Company A. The loan will be documented as an interest-free loan on repayment terms yet to be determined. It is not intended that Company B will have any assets apart from the shareholding in Company A. The purchase by Company B occurs in the context of a desire of the family to take the opportunity presented by Person C and D's exit to consolidate ownership of the group within the family for succession planning purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 109D | Income Tax Assessment Act 1936 paragraph 109D(1)(b) | Income Tax Assessment Act 1936 paragraph 109D(1)(d) | Income Tax Assessment Act 1936 subsection 109D(3) | Income Tax Assessment Act 1936 section 109K | Income Tax Assessment Act 1936 subsection 318(1) | Fringe Benefits Tax Assessment Act 1986 section 5B | Fringe Benefits Tax Assessment Act 1986 section 5C | Fringe Benefits Tax Assessment Act 1986 subsection 16(1) | Fringe Benefits Tax Assessment Act 1986 section 17 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 section 148

Reasons for decision: Summary: Issue 1 Question 1- 109D Deemed Dividend Section 109D of the ITAA 1936provides that a private company is taken to pay a dividend to an entity if the private company loans an amount to the entity during the year that is not fully repaid before lodgment date, and the entity is a shareholder in the private company (or an associate of the shareholder) or it is reasonable to conclude that the loan is made because the entity was a shareholder or associate at some time. All further legislative references in response to Issue 1 Question 1 are to the ITAA 1936unless otherwise stated. The meaning of loan for Division 7A purposes is contained in subsection 109D(3) and is as follows: (3) In this Division, loan includes: (a) an advance of money; and (b) a provision of credit or any other form of financial accommodation; and (c) a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and (d) a transaction (whatever its terms or form) which in substance effects a loan of money.' The meaning of associate is contained in section 318(1) and states the following: (1) For the purposes of this Part, the following are associates of an entity (in this subsection called the primary entity) that is a natural person (otherwise than in the capacity of trustee): (a) a relative of the primary entity; (b) a partner of the primary entity or a partnership in which the primary entity is a partner; (c) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee--the spouse or a child of that partner; (d) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust; (e) a company where: (i) the company is sufficiently influenced by: (A) the primary entity; or (B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or (C) another company that is an associate of the primary entity because of another application of this paragraph; or (D) 2 or more entities covered by the preceding sub - subparagraphs; or (ii) a majority voting interest in the company is held by: (A) the primary entity; or (B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the preceding paragraphs of this subsection; or (C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and because of the preceding paragraphs of this subsection.' Subdivision 7A(D) contains exclusions to loans being treated as dividends under 109D. Section 109K states that a private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan the private company makes to another company. | Detailed Reasoning - Application to your circumstances: In this case, the private company, being Company A, will make a loan to the relevant entity (Company B) in the current income year, satisfying paragraph 109D(1)(a). It is assumed that the loan will not be fully repaid before the lodgment day for the current financial year, satisfying paragraph 109D(1)(b). Company B would be an associate of Person A, thereby satisfying paragraph 109(1)(d), on the basis that Company B is a company that is substantially influenced by another entity that is an associate of the primary entity because of another application of subsection 318(1). That is, Company B is a company that is substantially influenced by Persons F G and H as directors, and Persons F G and H are associates of Person A because of another paragraph in subsection 318(1) being paragraph 318(1)(a) as they are Person A's relatives and Person A is the majority shareholder in Company A. The loan will be made from Company A to Company B, therefore section 109K will operate to exclude the loan being treated as a dividend under section 109D as it is a loan being made by one private company to another company. Therefore, the loan between Company A and Company B will not be treated as a deemed dividend under section 109D. Issue 2 Question 1- FBT An employer is liable to pay FBT on the employee's fringe benefits taxable amount as calculated under section 5B and 5C of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) All further legislative references in response to Issue 2 Question 1 are to the FBTAA unless otherwise stated. A fringe benefit is defined as follows in subsection 136(1): '"fringe benefit", in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit: (a) provided at any time during the year of tax; or (b) provided in respect of the year of tax; being a benefit provided to the employee or to an associate of the employee by: (c) the employer; or (d) an associate of the employer; ... and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so; in respect of the employment of the employee, but does not include: (f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936; or (g) a benefit that is an exempt benefit in relation to the year of tax; or ... (n) a payment of an amount that, under any provision of the Income Tax Assessment Act 1936, is deemed to be a dividend paid to the recipient; or ... (s) a loan (within the meaning of section 109D of the Income Tax Assessment Act 1936), if: (i) a dividend is not taken to be paid under that section in relation to the loan, but would be if section 109N of that Act were disregarded; or (ii) an amount is not included, as if it were a dividend, in the assessable income of an entity under section 109XB of that Act in relation to the loan, but would be if section 109N of that Act were disregarded.' The term 'benefit' is also defined in subsection 136(1) and includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under an arrangement for or in relation to the lending of money. Subsection 16(1) states: (1) Where a person (in this subsection referred to as the provider) makes a loan to another person (in this subsection referred to as the recipient), the making of the loan shall be taken to constitute a benefit provided by the provider to the recipient and that benefit shall be taken to be provided in respect of each year of tax during the whole or a part of which the recipient is under an obligation to repay the whole or any part of the loan.' The term 'loan' is defined in subsection 136(1) as the following: '"loan" includes: (a) an advance of money; (b) the provision of credit or any other form of financial accommodation; (c) the payment of an amount for, on account of, on behalf of or at the request of a person where there is an obligation (whether expressed or implied) to repay the amount; and (d) a transaction (whatever its terms or form) which in substance effects a loan of money.' Section 17 outlines circumstances where loan benefits are an exempt benefit. The term 'employee' is defined under section 136(1) and means a current employee, a future employee or a former employee. A current employee is defined under subsection 136(1) as someone who receives or is entitled to receive salary or wages, a future employee is defined as someone who will become a current employee, and a former employee is defined and someone who was previously a current employee. The term employer is defined in subsection 136(1) as a current employer, a future employer or a former employer. A current employer is defined under subsection 136(1) as a person (including a government body) who pays or is liable to pay salary or wages. The term associate is defined in subsection 136(1) to have the meaning given by section 318 of the ITAA 1936. Section 318 of the ITAA 1936 states: (1) For the purposes of this Part, the following are associates of an entity (in this subsection called the primary entity) that is a natural person (otherwise than in the capacity of trustee): (a) a relative of the primary entity; ... (e) a company where: (i) the company is sufficiently influenced by: (A) the primary entity; or (B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or (C) another company that is an associate of the primary entity because of another application of this paragraph; or (D) 2 or more entities covered by the preceding sub - subparagraphs; or (ii) a majority voting interest in the company is held by: (A) the primary entity; or (B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the preceding paragraphs of this subsection; or (C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and because of the preceding paragraphs of this subsection.' For a benefit to be a fringe benefit for the purpose of the definition in subsection 136(1), it must be provided to the employee or their associate in respect of the employment of the employee. Subsection 136(1) defines 'in respect of' to mean in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment. Section 148 provides that reference to 'a benefit to a person in respect of their employment' includes a reference to the provision of such a benefit whether to not the benefit is also provided in respect of, by reason of, by virtue of, or for or in relation directly or indirectly to, any other matter or thing. Miscellaneous Taxation Ruling MT 2019 Fringe benefits tax: shareholder employees of family private companies and directors of corporate trustees provides the Commissioners views on how the FBT provisions apply to shareholder employees of family private companies. It states that if a benefit provided to a shareholder employee solely by reason of that person's position as shareholder of the company, and not to any extent by reason of that person's employment by the company, the benefit would not be subject to FBT. It also states the following at paragraph 9 of the ruling: 9. In relation to benefits that are not expressly linked to the carrying out of the employee's duties, it is necessary to examine all the facts and circumstances of the case to establish whether the benefit is fairly to be regarded as having been granted to the shareholder/employee in his or her capacity as an employee or as a shareholder. Factors such as the nature of the benefit, any cash remuneration paid, the nature and extent of any trading activities of the company, the extent of any services rendered by the shareholder/employee and the extent of his or her shareholding may be relevant in concluding whether a non-cash benefit was provided as remuneration for services or in the capacity of shareholder. In relation to the benefit being a loan, MT 2019 states the following at paragraphs 16 and 18: 16. In some cases, it will be clear that the granting of a low-interest or interest-free loan was intended to form part of the remuneration of a shareholder/employee. For example, a family company might employ particular family members (e.g., an adult son) under employment conditions similar to those that would apply under an arm's length employment agreement. In these circumstances, a low-interest loan made to a shareholder employee could well be an element of his or her remuneration. If the value of loan benefits provided to shareholder/employees varied in line with their services provided to the company rather than their shareholdings, this would also be an indication that the loan was provided in respect of employment. ... 18. In other cases, it will be equally clear that a loan was granted to a shareholder/employee solely by virtue of his or her shareholding. This would be the case, for example, where a family company which has been used merely as a vehicle for holding family investments such as the family home or shares disposes of those assets and then lends the accumulated funds to shareholder directors who have performed only nominal duties for the company. Directors who perform only nominal duties would not ordinarily be expected to receive large interest-free loans by way of remuneration.' In J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 ( Knowles ), the full Federal Court examined the meaning of 'in respect of' an employee's employment and held that the phrase required a 'nexus, some discernible and rational link, between the benefit and employment', though noted that 'what must be established is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment'. A similar view was also held in Essenbourne Pty Ltd v FC of T 2002 ATC 5201 and Starrim Pty Ltd v FCT (2000) 102 FCR 194; [2000] FCA 952; 2000 ATC 4460; (2000) 44 ATR 487. The full Federal Court in Knowles also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'. Taxation Ruling TR 2018/7 Income Tax: employee remuneration trusts , contains the commissioners view on how taxation laws apply to the employee share scheme rules in Division 83A of the Income Tax Assessment Act 1997. While this case does not consider employee share schemes, TR 2018/7 contains relevant information on how the FBT provisions apply in circumstances where a benefit is applied to a person who is an employee and a shareholder or an associate of a shareholder of an employer. It states the following: 60. Benefits have an insufficient connection with employment and are unlikely to be remuneration or remuneration in nature when they are received by the employee other than in their capacity as an employee, such that it can be concluded after consideration of all relevant circumstances, that the benefit is not being provided to the employee in respect of employment. This will arise where the consideration for the payment is not the employment services. Factors that will evidence that benefits provided by a trustee are not remuneration or remuneration in nature include the following: • the benefits are consideration for an arm's length surrender, exercise or disposal of an asset (property or rights) and that asset was acquired in return for valuable and arm's length consideration (or as remuneration, and those rights were appropriately dealt with as such) • the benefits arise because the recipient is a beneficiary of a trust and the trustee has exercised its power under the deed to provide those benefits to the recipient independent of an arrangement or understanding with, or direction by, the employer • the benefits do not rely on continuing employment nor have regard to, or are conditional upon, individual employment-related performance conditions, or • the timing and amount of benefits is identical in respect of all recipients who hold the same property or rights, regardless of their employment relationship with the employer. 61. Where a contribution is paid on the employee's behalf or as they direct and they are taken to have derived the contribution as remuneration at that point, the employee cannot derive that same amount again should it be paid out of the trust and to the extent it is made up of that earlier contribution.' | Detailed Reasoning - Application to your circumstances: This ruling considers whether the benefit is provided to the employee 'in respect of employment of the employee' as per the definition of 'fringe benefit' contained in subsection 136(1). To establish whether a sufficient or material connection exists (as per Knowles ) between the provision of the benefit (that is, the loan from Company A to Company B) and the employment of Persons F, G, and H, it is necessary to consider the circumstances in which the benefit has been provided. Persons F, G, and H's employment under the various entities controlled by Company A is not in full time operational roles, and does not include wider management obligations or running the business day to day. Their shareholding as a result of the loan is not in proportion with their employment activity, it will be in equal shares. As per TR 2018/7, the benefit does not rely on continuing employment, nor does it have regard to individual employment related conditions. This is an indicator the benefit is being provided in relation to a reason other than their employment, in this case the benefit is in respect of association to the majority shareholder of Company A, Person A, and the succession planning for the group within the family. Therefore, there is no sufficient connection between the benefit and the employment in question, consequently the benefit is not 'in respect of' employment of the employee and the loan is not a fringe benefit as per subsection 136(1).