Private ruling: Commissioner's discretion to disregard Division 7A
Published: March 2013

Ruling: Q1: Will the Commissioner exercise his discretion under section 109RB of Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) to disregard the deemed dividends for the loans made by the Private Company to the Family Trust? | A1: Yes.

Relevant facts and circumstances: Over the course of a number of years, a private company (Private Company) loaned amounts to the trustee of a related family trust (Family Trust) on a monthly basis. The trustee of the Family Trust held shares in the Private Company. These amounts were specifically set aside and invested by the Family Trust in separate bank accounts, of which the Private Company could call upon for the payment of business expenses incurred by the Private Company. Although these bank accounts were in the name of the Family Trust, the directors of the Private Company always considered that they were being held on its behalf, and were available for the Private Company's use. In addition to these bank accounts, the Family Trust also held the commercial property in which the Private Company used as its business premises. No loan agreement between the Private Company and the Family Trust had ever been entered into, and no interest was ever paid by the Family Trust to the Private Company in respect of the borrowings. However, countering this was the fact that the Private Company never paid rent to the Family Trust for the use of the commercial property, and the Family Trust never on-lent any of the money held in these bank accounts to its beneficiaries who were also the shareholders of the Private Company. It was only recently that the tax agent for both the Private Company and the Family Trust was made aware that the loans between these two entities would attract the operation of Division 7A. The tax agent was a sole practitioner who ran a small suburban practice servicing small businesses and individuals, and was of the long-standing view that Division 7A only applied to Private Company loans to its shareholders. Furthermore, the directors of the Private Company and the trustee of the Family Trust had no knowledge of Division 7A. On becoming aware of that Division 7A did apply, the tax agent advised the Private Company and the Family Trust to discontinue the monthly lending of money and also to embark on a plan to repay the loans, to the extent necessary to constitute corrective action in the eyes of the Commissioner, as soon as practicable. As of the date of this application for advice, evidence was provided that the majority of the required repayments had been made.


Reasons for decision: Summary: The discretion may be exercised if the deemed dividend arose because of an honest mistake or inadvertent omission. | Detailed Reasoning - Section 109RB Discretion: Section 109RB of Division 7A of Part III of the ITAA 1936 provides the Commissioner the discretionary power to either disregard the operation of Division 7A or allow a deemed dividend to be franked. This can be exercised only when the deemed dividend arose because of an honest mistake or inadvertent omission by any of: · the recipient; · the private company; · any other entity whose conduct contributed to that result. [s109RB(1)(b)] Practice Statement Law Administration PS LA 2011/29 provides guidance for Tax Office staff exercising the discretion. The Practice Statement describes a two step procedure; the first step being the identification of an honest mistake or inadvertent omission giving rise to a Div 7A deemed dividend, and the second step being the application of factors in subsection 109RB(3) of the ITAA 1936 to determine whether the discretion should be exercised. | Detailed Reasoning - Was there an honest mistake or inadvertent omission?: In this case the trustee of a Family Trust held shares in a Private Company. That Private Company made loans to the Family Trust. You believed that Division 7A only applied to private company loans to individuals and not to trusts. Loaned funds have been used for commercial purposes. The Commissioner has come to the view that there had been an honest mistake as per Taxation Ruling TR 2010/8 in this case, that is, your belief that Division 7A only applied to individuals and not to trusts. You believed that a loan from a private company to a trust did not breach Division 7A, and believed that Division 7A only applied to private company loans to individuals. | Detailed Reasoning - Corrective action: The corrective action proposal you have provided includes a repayment schedule that will result in the loan being fully repaid. The proposed corrective action has been deemed it to be acceptable by the Commissioner . | Detailed Reasoning - Previous application of Division 7A: There is no evidence of any prior breaches of Division 7A. | Detailed Reasoning - Other matters: You have voluntarily disclosed the deemed dividend by lodging a request for binding advice. The matter arose from a voluntary disclosure, and loaned funds were used for commercial purposes. | Detailed Reasoning - Decision: In relation to the application of Division 7A that resulted from loans made by the Private Company to the Family Trust, the Commissioner is of the view that the application of Division 7A arose because of an honest mistake by you. The Commissioner has decided to exercise his discretion in accordance with subsection 109RB(2) of the ITAA 1936 to disregard the deemed dividend, on the condition that the corrective action proposal is fully implemented.