Private ruling: Fixed unit trust
Date of advice: 24 October 2023
Published: 4 December 2023
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will Unit Trust (UT), Fixed Unit Trust 1 (UT1), Fixed Unit Trust 2 (UT2), and Fixed Unit Trust 3 (UT3) be 'shareholders or associates of shareholders' of Private Company for the purposes of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Would the amounts to be paid by Private Company to UT for the subscription of Income Preference Units (IPUs) constitute a 'loan' for the purposes of section 109D of the ITAA 1936? | A2: No. | Q3: If the Commissioner found that the answer to question one is 'Yes' and that the amounts to be paid are loans under section 109D of the ITAA 1936, would section 109R of the ITAA 1936 apply to reduce the amount of the loan? | A3: Does not apply. | Q4: Would the amounts to be paid by Private Company to UT for the subscription of IPUs constitute a 'payment' for the purposes of section 109C of the ITAA 1936? | A4: Yes. | Q5: If the answer to question four is 'Yes' and the amounts to be paid are payments under section 109C of the ITAA 1936, does the exemption in section 109J of the ITAA 1936 apply? | A5: Yes. | Q6: Would the amounts to be paid by UT to UT1, UT2 and UT3 be considered loans under sections 109T and 109W of the ITAA 1936 so that a deemed dividend arises under section 109D of the ITAA 1936? | A6: No. | Q7: Would the amounts to be paid by UT to UT1, UT2 and UT3 be considered payments under sections 109T and 109V of the ITAA 1936 so that deemed dividends will arise under section 109C of the ITAA 1936? | A7: No.

Relevant facts and circumstances: 1. A new investment company called Private Company will be incorporated. 2. Private Company will be a 'private company' as defined in subsection 103A(1) of the ITAA 1936. 3. The sole shareholder of Private Company will be a newly established family discretionary trust called DT1. 4. A valid family trust election will be put in place regarding the DT1. 5. The distributions of the DT1 are to members of the family and other companies controlled by the family. 6. The trustee of DT1 will be a newly incorporated corporate trustee named Trustee. The sole shareholder of the Trustee will be XXXXXX. 7. The family will establish a second family discretionary trust called DT2. 8. DT2 will subscribe for 100 Capital Units and 100 Ordinary Income Units in a newly established unit trust called Unit Trust (UT). 9. UT will be a unit trust with the ability to issue different classes of units including IPUs. 10. Private Company will subscribe for IPUs in UT. The amount payable for the IPUs will be the amount per IPU determined by the trustee of PPUT in accordance with the clause Z of the Draft Deed and specified in the unit applications and unit certificates that will be issued. 11. The Trustee will obtain a third-party market valuation of the IPUs prior to issuing any new IPUs in order to determine an appropriate Issue Price. 12. At the time of the IPU subscription, Private Company may pay cash to UT for the IPUs, if at the time of the IPU subscription, no cash is immediately transferred at that time, Private Company will still credit an amount in favour of UT representing the amount it will owe for the subscribed IPUs. 13. Private Company will make a payment to UT to subscribe for IPUs and those funds raised from the IPU subscription will be used by UT to make payments to UT1; UT 2; and UT 3 when UT subscribes for units in each of these unit trusts. 14. UT1, UT2 and UT3 will invest in separate property developments. 15. The draft deeds for UT1, UT2 and UT3 will include a clause that is similar to clause Z of the draft deed for UT, which would mean that the amounts payable for units in these unit trusts will still be determined by the trustees and approved by a resolution of unit holders. 16. The trustees of UT1, UT2 and UT3 will obtain third party valuations of the units prior to setting the issue price of the units. The issue price of the units will reflect an arm's length price. 17. In accordance with the Draft Deed for UT, the IPUs carry the following rights: • The right to be paid the Income Coupon calculated on the Issue Price for each IPU. The Income Coupon: - xxxx • Redemption of units: - xxxx.

Relevant legislative provisions: Income Tax Assessment Act 1936 division 7A | Income Tax Assessment Act 1936 section 109C | Income Tax Assessment Act 1936 paragraph 109C(3)(a) | Income Tax Assessment Act 1936 subparagraph 109C(3)(b)(i) | Income Tax Assessment Act 1936 subparagraph 109C(3)(b)(ii) | Income Tax Assessment Act 1936 subparagraph 109C(3((b)(iii) | Income Tax Assessment Act 1936 paragraph 109C(3((c) | Income Tax Assessment Act 1936 section 109CA | Income Tax Assessment Act 1936 subsection 109C(3A) | Income Tax Assessment Act 1936 section 109D | Income Tax Assessment Act 1936 subsection 109D(3) | Income Tax Assessment Act 1936 paragraph 109D(3)(a) | Income Tax Assessment Act 1936 paragraph 109D(3)(b) | Income Tax Assessment Act 1936 paragraph 109D(3)(c) | Income Tax Assessment Act 1936 paragraph 109D(3)(d) | Income Tax Assessment Act 1936 section 109J(a) | Income Tax Assessment Act 1936 section 109J(b) | Income Tax Assessment Act 1936 section 109R | Income Tax Assessment Act 1936 subsection 109R(1) | Income Tax Assessment Act 1936 paragraph 109R(1)(a) | Income Tax Assessment Act 1936 paragraph 109R(1)(b) | Income Tax Assessment Act 1936 subsection 109R(2)(a) | Income Tax Assessment Act 1936 paragraph 109R(2)(b)(i) | Income Tax Assessment Act 1936 paragraph 109R(2)(b)(ii) | Income Tax Assessment Act 1936 paragraph 109R(3)(c)(i) | Income Tax Assessment Act 1936 paragraph 109R(3)(c)(ii) | Income Tax Assessment Act 1936 section 109T | Income Tax Assessment Act 1936 section 109T(1)(a) | Income Tax Assessment Act 1936 section 109T (1)(b) | Income Tax Assessment Act 1936 subparagraph 109T(1)(c)(i) | Income Tax Assessment Act 1936 subparagraph 109T(1)(c)(ii) | Income Tax Assessment Act 1936 subparagraph 109T(1)(c)(i) | Income Tax Assessment Act 1936 section 109V | Income Tax Assessment Act 1936 subsection 109V(2) | Income Tax Assessment Act 1936 subsection 109W(1) | Income Tax Assessment Act 1936 paragraph 109W(2)(a) | Income Tax Assessment Act 1936 paragraph 109W(2)(b) | Income Tax Assessment Act 1936 section 318 | Income Tax Assessment Act 1936 subsection 318(3) | Income Tax Assessment Act 1936 paragraph 318(3)(b) | Income Tax Assessment Act 1936 paragraph 318(3)(c) | Income Tax Assessment Act 1936 paragraph 318(1)(d) | Income Tax Assessment Act 1936 paragraph 318(6)(a) | Income Tax Assessment Act 1936 paragraph 318(2)(c)

Reasons for decision: Summary: UT, UT1, UT2 and UT3 will be 'shareholders or associates of shareholders' of Private Company. | Detailed Reasoning - Detailed reasoning: Shareholder The term 'shareholder' as used in Division 7A is defined in section 6(1) of the Income Tax Assessment Act 1936 as: shareholder includes member or stockholder. Part 1.5 of the Corporations Act 2001 at section 1.5.6 Shares and shareholders provides that: ... 6.1 Becoming a shareholder and ceasing to be a shareholder A person may become a shareholder of a company in several ways, including the following: • the person being listed as a shareholder of the company in the application for registration of the company • the company issuing shares to the person • the person buying shares in the company from an existing shareholder and the company registering the transfer. ... [sections 117, 120, 601AA--601AD] In the High Court case of Patcorp Investments Ltd & Ors v FCT (1976) 140 CLR 247; 76 ATC 422589, Mason J., in discussion the meaning of the definition of the term 'shareholder' as described in subsection 6(1) to the ITAA 1936 stated: Although the word "shareholder" ordinarily signifies a person who is registered as the holder of shares (see Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation (1949) 78 CLR 353 , at pp363-365 ), the word "member" may be wide enough to include a subscriber to the memorandum who is a person whose name is not entered in the register of members (Companies Act, 1961, s . 16) . And the provisions of s. 151 (1) with respect to keeping of the register of members indicate that a person's character as a member is initially ascertained by reference to circumstances dehors the register. (at p272) On the facts, UT, UT1, UT2 and UT3 are not shareholders of Private Company. In this case the shareholder of Private Company is the trustee for the DT1. The question becomes are UT, UT1, UT2 and UT3 'associates of shareholders' of Private Company, being associates of DT1? Associates of shareholders The term 'associate' as used in Division 7A is defined in section 109ZD of the ITAA 1936. An 'associate' has the meaning given by section 318 of the ITAA 1936. In accordance with subsection 318(3) of the ITAA36: ... the following are associates of a trustee (in this subsection called the primary entity ): (a) any entity that benefits under the trust; (b) if a natural person benefits under the trust - any entity that, if the natural person were the primary entity, would be an associate of that natural person because of subsection (1) or because of this subsection; (c) if a company is an associate of the primary entity because of paragraphs (a) and (b) of this subsection - any entity that, if the company were the primary entity, would be an associate of the company because of subsection (2) or because of this subsection. Further, paragraph 318(6)(a) of the ITAA 1936 states that, for the purposes of section 318 of the ITAA 1936: a reference to an entity benefiting under a trust is a reference to the entity benefiting, or being capable (whether by the exercise of a power of appointment or otherwise) of benefiting, under the trust, either directly or through any interposed companies, partnerships or trusts: ... It is possible that under the terms of the DT1 deed that UT, UT1, UT2 and UT3 are entities that are capable (whether by the exercise of a power of appointment or otherwise) of benefiting, from the DT1 (ie an entity included for consideration as a beneficiary to which a trust distribution could be made). This will depend on the terms of the trust deed. The test is not whether there is an intention that entities benefit or otherwise, but whether they are capable of benefiting. Nevertheless, it is considered that UT, UT1, UT2 and UT3 are associates pursuant to the operation of paragraphs 318(3)(b) and 318(3)(c) of the ITAA 1936. On the facts provided, the beneficiaries of DT1 will be members of the XXXXXX family and other companies controlled by the XXXXXX family. UT, UT1, UT2 and UT3 will be considered associates of DT1 if paragraphs 318(3)(b) or (c) of the ITAA 1936 apply. Hence UT, UT1, UT2 and UT3 will be considered associates of DT1 if these entities are associates of any of the beneficiaries of DT1. If a beneficiary of DT1 (the shareholder of is a natural person, then UT, UT1, UT2 and UT3 will be associates of that natural person due to paragraphs 318(1)(d) and 318(6)(a) of the ITAA 1936 as the future income of UT, UT1, UT2 and UT3 will be distributed indirectly via Private Company and DT1 to the natural person resulting in the natural person indirectly benefiting under UT, UT1, UT2 and UT3. Similarly, if a beneficiary of DT1 is a company, then UT, UT1, UT2 and UT3 will be associates of that company due to paragraphs 318(2)(c) and 318(6)(a) of the ITAA 1936 as the future income of UT, UT1, UT2 and UT3 will be distributed indirectly via Private Company and DT1 to the company resulting in the company indirectly benefiting under UT, UT1, UT2 and UT3. Consequently, as UT, UT1, UT2 and UT3 will be associates of the beneficiaries of DT1, paragraphs 318(3)(b) and / or 318(3)(c) of the ITAA 1936 will apply to treat UT, UT1, UT2 and UT3 as being associates of DT1 (the shareholder of Private Company). Therefore UT, UT1, UT2 and UT3 will be associates of a shareholder of Private Company for the purposes of Division 7A of the ITAA 1936. | Summary: The amounts paid by Private Company to UT for the subscription of IPUs will not constitute a 'loan' for the purposes of section 109D of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: The meaning of loan for Division 7A of the ITAA 1936 purposes is as follows: 109D(3) What is a loan? 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. General meaning The term 'loan' includes a loan within its ordinary meaning. The Commissioner has considered the ordinary meaning of 'loan in Self Managed Superannuation Funds Ruling SMSFR 2009/4: Self Managed Superannuation Funds: the meaning of 'asset', 'loan', 'investment in', 'lease' and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision) Act 1993 : General meaning of 'loan' 48. The term 'loan' is defined in the Macquarie Dictionary[19] as: 1 . the act of lending; a grant of the use of something temporarily: the loan of a book. 2 . something lent or furnished on condition of being returned, especially a sum of money lent at interest... 49. Similarly, the Australian Oxford Dictionary[20] defines 'loan' as: 1 . something lent, esp. a sum of money to be returned normally with interest. 2 . the act of lending or state of being lent... 50. In the Victorian Supreme Court case of Brick and Pipe Industries Ltd. v. Occidental Life Nominees Pty. Ltd. and others ,[21] Ormiston J noted at pages 321-322: Strangely the word 'loan' has not been frequently defined and in the many authorities cited, although the concept of lending was assumed to be understood, only one definition appears, namely in the judgement of Richardson J. in Re Securitibank Ltd. (No. 2) [1978] 2 NZLR 136, at p. 167: '... the essence of a loan of money is the payment of a sum of money on condition that at some future time an equivalent amount will be repaid.'... To be a loan for the purposes of Division 7A there is no requirement for there to be a fixed date for redemption of the units or a guaranteed requirement that the amount be redeemed. Nevertheless, in this case there is no obligation for UT to repay an amount to Private Company. The obligation to pay the amount arises from the subscription for the issue of IPUs; the purchase of financial chattels. In this case the subscription amount for the IPUs is not a 'loan' of Private Company's money to UT. | Summary: As there is no loan for the purposes of section 109D of the ITAA 1936, section 109R of ITAA 1936 will have no application. | Detailed Reasoning - Detailed reasoning: Relevantly, section 109R of the ITAA 1936 states: 109R (1) [ Some payment not considered] This section provides for some payments to a private company in relation to a loan the private company made to an entity not to be taken into account for the purpose of working out: (a) how much of the loan has been repaid for the purposes of sections 109D and 109E (which treats amounts of loans that have not been repaid as dividends); or (b) the minimum yearly repayment for the loan under subsection 109E(5). Subsection 109R(2) of the ITAA 1936 states: 109R(2) [ Intention to obtain loan ] A payment must not be taken into account if: (a) a reasonable person would conclude (having regard to all the circumstances) that, when the payment was made, the entity intended to obtain a loan or loans from the private company of a total amount similar to, or larger than, the payment; or (b) both of the following subparagraphs apply: (i) the entity obtained, before the payment was made, a loan or loans from the private company of a total amount similar to, or larger than, the amount of the payment; (ii) a reasonable person would conclude (having regard to all the circumstances that the entity obtained the loan or loans in order to make the payment. 109R(3) [Set offs] Subsection (2) does not apply to a payment made by setting off against an amount payable in relation to the loan: ... (c) if the entity has transferred property to the private company - an amount equalling the difference between: (i) the amount that a party at arm's length from the entity would have paid for the transfer of the property to the party; and (ii) the amount that the private company has already paid the entity (by way of set-off or otherwise) for the transfer. In this case, as there is no loan for the purposes of section 109D of the ITAA 1936, section 109R of the ITAA 1936 has no application. | Summary: The amounts to be paid by Private Company to UT for the subscription of IPUs will be a 'payment' for the purposes of section 109C of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: For the purposes of Division 7A of Part III of the ITAA 1936, 'payment' has the meaning in subsection 109C(3) and section 109CA of the ITAA 1936. Relevantly, subsection 109C(3) defines 'payment' as meaning: (a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and (b) a credit of an amount to the extent that it is: (i) to the entity; or (ii) on behalf of the entity; or (iii) for the benefit of the entity; and (c) a transfer of property to the entity. ... The word 'credit' is not defined in the Income Tax Assessment Acts. Accordingly, it should be interpreted by having regard to its ordinary meaning in the context in which it is used. The Macquarie Concise Dictionary (2nd Edition) defines it to mean: to enter upon the credit side of an account; give credit for or to; to give the benefit of such an entry to (a person, etc). Subsection 109C(3A) of the ITAA 1936 provides: Loans are not payments. However, a loan to an entity is not a payment to the entity. Subsection 109D(3) of the ITAA 1936 provides that a 'loan' to an entity is: (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 subscription by Private Company for IPUs issued by UT will create a legally enforceable contractual obligation on the part of Private Company to pay the consideration for those IPUs. The consideration will be the fixed amount per IPU determined by the trustee of UT in accordance with the clause of the Draft Deed as specified in the unit applications and unit certificates that will be issued. If at the time of the IPU subscription, Private Company pays cash to UT for the IPUs, this will be considered a payment under paragraph 109C(3)(a) of the ITAA 1936. If at the time of the IPU subscription, no cash is immediately transferred at that time, Private Company will still credit an amount in favour of UT representing the amount it will owe for the subscribed IPUs. This would constitute a payment for the purposes of section 109C of the ITAA 1936. In this case it is considered that the subscription amount is a 'payment' for the purposes of subsection 109C(3) of the ITAA 1936. Relevantly, subsection 109C(3A) of the ITAA 1936 provides that where a payment is considered to be a 'loan' to an entity it is not a 'payment' to the entity. At question two it was found that these subscription amounts are not a 'loan' and therefore it remains a 'payment'. | Summary: The amounts to be paid for the IPUs are 'payments' for the purposes 109C of the ITAA 1936 and would be a deemed dividend. However, section 109J of the ITAA 1936 applies to exempt the payment from the application of section 109C of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 109J of the ITAA 1997 states that: A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment: (a) discharges an obligation of the private company to pay money to the entity; and (b) is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length. Section 109J of the ITAA 1936 was inserted by Act No 47 of 1998. The Replacement Supplementary Explanatory Memorandum to that accompanied Taxation Laws Amendment Bill (No 7) 1997 explains the scope of the amended 109J of the ITAA 1936 and includes the following: | Detailed Reasoning - New section 109J - Payments discharging pecuniary obligations not treated as Dividends: 4.31 Amendment 60 will replace new section 109J to ensure that payments made to discharge a pecuniary obligation will not be treated as a dividend by new section 109C. 4.32 New section 109J , as originally drafted, would exclude any payment by a private company to a shareholder which constitutes the payment of a debt from being treated as a deemed dividend. However, in some commercial transactions a debt may not come into existence. For example, the subscription of units in a unit trust which is immediately satisfied by the issuing of the units may not give rise to a debt. This amendment will prevent a payment in discharge of a pecuniary obligation from forming part of such a transaction from being treated as a Dividend. Nevertheless, if the subscription is made by a private company as part of an arrangement to make a loan or payment to the shareholder (or associate) of the company, then new Subdivision E may apply to treat the loan or payment to the shareholder (or associate) as a payment by the company. The Replacement Supplementary Explanatory Memorandum supports the view that transactions, such as the subscription for units in a unit trust, would not give rise to a Division 7A deemed dividend. Subscribing for units in a unit trust is a means of paying to acquire separate property (and in doing so, discharging a pecuniary obligation), as distinct from a loan or payment for Division 7A purposes. In this case the pecuniary obligation for the purposes of section 109J of the ITAA 1936 is that Private Company will make the payment for its subscription for the IPUs. The amount of the pecuniary obligation will be the price to subscribe for IPUs to be issued by UT as determined by the trustee of the UT in accordance with the relevant clause of the Draft Deed. As the trustee of the UT will obtain a third-party valuation of the IPUs in order to set the issue price of the IPUs at the point in time of each IPU subscription the amount to be paid for the IPUs will not be more than what will be required to discharge the obligation had Private Company and UT been dealing with each other at arm's length, as the amount paid will be the arm's length price for the IPUs. Accordingly, section 109J of the ITAA 1936 will apply such that Private Company will not be taken, under section 109C of the ITAA 1936, to pay a dividend to UT because the payment made will discharge an obligation Private Company will have to pay money to UT in exchange for the issue of IPUs. Further, as Private Company and UT will deal with each other at arm's length as the Trustee will obtain third-party valuations of the IPU prior to setting the Issue Price of any new units in accordance with the relevant clause of the draft trust deed. Consequently, Private Company will not pay more than what will be required to discharge the obligations had the parties been dealing with each other at arm's length as the price paid will be the market value of the IPUs. Hence, no deemed dividend will arise under section 109C of the ITAA 1936. | Summary: The amounts paid by UT to UT1, UT2 and UT3 are not considered to be loans under sections 109T and 109W of the ITAA 1936 but are considered to be 'payments'. Consequently, no deemed dividends will arise under section 109D of ITAA 1936. In relation to the 'payments', subsection 109V(2) of the ITAA 1936 provides the Commissioner with broad discretion on what constitutes consideration for anything that may be provided by the target entity and the private company. The payment is at market value and is commercial in nature. Consequently, the amount of the payment taken to have been paid by Private Company to UT1, UT2 and UT3 for the purpose of section 109V of the ITAA 1936 will be nil. Therefore, for the purposes of section 109T, no amount of the payment is deemed to be a dividend under section 109C. | Detailed Reasoning - Detailed reasoning: Section 109T of the ITAA 1936 states the following: 109T (1) [ When Division operates ] This Division operates as if a private company makes a payment or loan to an entity (the target entity ) as described in section 109V or 109W if: (a) the private company makes a payment or loan to another entity (the first interposed entity ) that is interposed between the private company and the target entity; and (b) a reasonable person would conclude (having regard to all the circumstances) that the private company made the payment or loan solely or mainly as part of an arrangement involving a payment or loan to the target entity; and (c) either: (i) the first interposed entity makes a payment or loan to the target entity; or (ii) another entity interposed between the private company and the target entity makes a payment or loan to the target entity. Tax Determination TD 2018/13 Income tax: Division 7A: can section 109T of the Income Tax Assessment Act 1936 apply to a payment or loan made by a private company to another entity (the 'first interposed entity') where that payment or loan is an ordinary commercial transaction? (TD 2018/13) states the following: 66. In particular, subsection 109T(1) provides that a private company will be taken to make a payment or loan to the target entity where a reasonable person would conclude (having regard to all the circumstances) that the private company made the payment or loan to the first interposed entity, solely or mainly, as part of an arrangement involving a payment or loan through one or more interposed entities to the target entity. 67. If the outcome of the arrangement is that the target entity would effectively receive a tax-free distribution from the private company (but for the application of Subdivision E of Division 7A), the arrangement properly falls for consideration under Subdivision E of Division 7A (subject to the exclusion in subsection 109T(3)). This would be so regardless of the intention of the parties to the arrangement, given the intended purpose of Division 7A.6 68. However, if a payment or loan made by a private company to the first interposed entity itself results in Division 7A treating the amount as a dividend to the first interposed entity, Subdivision E of Division 7A does not apply to the payment or loan made by the interposed entity.7 Further, and importantly, a transaction which itself results in Division 7A treating the amount as a dividend to the first interposed entity is the only kind of transaction, between the private company and the first interposed entity, to which subsection 109T(1) cannot apply. 69. Subject to that exclusion, the Commissioner must consider whether the reasonable person test in paragraph 109T(1)(b) is satisfied for every arrangement involving a payment or loan made by a private company to a first interposed entity (regardless of the nature of the payment or loan). The fact that the payment or loan may be considered to be an ordinary commercial transaction does not, of itself, exclude the operation of section 109T. 70. Further, even if all, or some, of the amount of the payment made by the private company is included in the first interposed entity's assessable income, this does not preclude subsection 109T(1) from applying such that a private company will be taken to have made a payment or loan to the target entity.8 | Detailed Reasoning - Other ordinary commercial transactions that do not involve dividends assessable under section 44 apart from the operation of Division 7A: 77. Similarly, any other kind of payment or loan that is an ordinary commercial transaction, or included in the interposed entity's assessable income, could be a payment or loan to which section 109T applies if (taking into consideration all of the circumstances) a reasonable person would conclude that the payment or loan by the private company was made solely or mainly as part of an arrangement involving the payment or loan to the target entity. 78. If subsection 109T(1) did not apply where the payment or loan from the private company to the first interposed entity was a transaction ordinarily seen in commercial dealings, the application of Division 7A could also be overcome by the private company subscribing for an equity interest in another entity (for example, units in a unit trust or an interest in a partnership) as part of an arrangement involving a payment or loan from an interposed entity to the target entity. 79. As with section 44 dividends, there is nothing about the nature of any other ordinary commercial transaction which supports an interpretation of section 109T that would limit its application. For example, neither a loan from the private company to another company (being the first interposed entity), nor a payment which discharges a pecuniary obligation by the private company to the first interposed entity, would (by their nature) exclude the operation of section 109T. The former is made clear by subsection 109X(1) and, as is explained in TD 2012/12, the latter is a factor which may be taken into account in setting the amount of the deemed payment or notional loan under sections 109V and 109W respectively. | Detailed Reasoning - Amount of the payment or loan taken to have been made by the private company to the target entity: 80. Where section 109T applies, the amount of the deemed payment or notional loan taken to have been made by the private company to the target entity is determined by the Commissioner taking into account the factors described in sections 109V and 109W respectively.11 81. In addition to the other relevant factors described in TD 2011/16, the Commissioner may, in appropriate cases, consider (having regard to the intended purpose of Division 7A) the extent to which income tax is otherwise payable because of the structure used in the arrangement. Guidance on the Commissioner's application of paragraph 109T(1)(b) is found in Taxation Determination TD 2011/16 : Income Tax: Division 7A - payments and loans through interposed entities - factors the Commissioner will take into account in determining the amount of any deemed payment or notional loan arising under section 109T of the Income Tax Assessment Act 1936 (TD 2011/16). Paragraph 34 of TD 2011/16 explains that all that is required to satisfy paragraph 109T(1)(b) of the ITAA 1936 is for a reasonable person to conclude that the payment or loan from the private company to the interposed entity was part of an arrangement involving a payment or loan to the target entity (a back-to-back arrangement). It further states that although there is no requirement to demonstrate that a purpose of the arrangement was to avoid Division 7A, 'such a purpose or intent may help establish such a reasonable conclusion'. For the purposes of paragraph 109T(1)(a) of the ITAA 1936, Private Company will make a payment to UT, referred to therein as 'the First interposed entity ', by subscribing for IPUs. The funds raised from the IPU subscription will be used by UT to make a 'payment or loan to another entity, 'the target entity. In this case there are three target entities being: UT1, UT2 and UT3 when UT subscribes for units in each of these unit trusts. As such, paragraph 109T(1)(a) of the ITAA 1936 will be satisfied. For the purposes of paragraph 109T(1)(b) of the ITAA 1936 a reasonable person would conclude that Private Company (the private company) made a payment or loan to UT (the interposed entity) as part of an arrangement involving a payment or loan to UT1, UT2 and UT3 (the target entities). UT will make payments to UT1, UT2 and UT3 when it subscribes for units in UT1, UT2 and UT3 for the purposes of paragraph109T(1)(c) of the ITAA 1936. As such, section 109T of the ITAA 1936 would apply to the proposed arrangement. Section 109W of the ITAA 1936 states: 109W (1) Private company taken to lend if target entity receives loan. If the target entity is lent an amount by the interposed entity, this Division operates as if the private company had made a loan (the notional loan ) of the amount (if any) determined by the Commissioner to the target entity when the interposed entity made the loan to the target entity. 109W (2) How big is the notional loan? In determining the amount of the notional loan, the Commissioner must take account of: (a) the amount the interposed entity lent the target entity; and (b) how much (if any) of that amount the Commissioner believes represented consideration payable to the target entity by the private company or any of the interposed entities for anything (assuming that the consideration payable equals that for similar transactions at arm's length). The meaning of loan for Division 7A purposes is as follows: 109D(3) What is a loan? 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. Refer to question two for an analysis of the meaning of the term 'loan' for the purposes of Division 7A of the ITAA 1936. Based on that discussion, in this case there is no obligation for UT1, UT2 and UT3 to repay an amount to UT. The obligation to pay the amount arises from the subscription for the issue of units in UT1, UT2 and UT3. Consequently, UT1, UT2 and UT3 will not be lent amounts by UT for the purpose of subsection 109W(1) of the ITAA 1936. Therefore, section 109W of the ITAA 1936 has no application to the amount transferred from UT to UT1, UT2 and UT3. Section 109V states: 109V(1) Private company taken to pay if target entity is paid. If the target entity is paid an amount by the interposed entity, this Division operates as if the private company had paid the amount (if any) determined by the Commissioner to the target entity when the interposed entity paid the target entity. 109V(2) Determining the amount of the private company's payment. In determining the amount of the payment the private company is taken to have made, the Commissioner must take account of: (a) the amount the interposed entity paid the target entity; and (b) how much (if any) of that amount the Commissioner believes represented consideration payable to the target entity by the private company or any of the interposed entities for anything (assuming that the consideration payable equals that for similar transactions at arm's length). See the detailed reasoning at question 4 for discussion of the term 'payment'. The subscription by UT for units issued by UT1, UT2 and UT3 will create a legally enforceable contractual obligation on the part of UT to pay the consideration for those units. The consideration will be the amount specified in the unit applications and unit certificates that will be issued. In this case it is considered that the subscription amount is a 'payment' for the purposes of subsection 109C(3) of the ITAA 1936. Relevantly, subsection 109C(3A) of the ITAA 1936 provides that where a payment is considered to be a 'loan' to an entity it is not a 'payment' to the entity. In this case it was decided that these subscription amounts are not a 'loan' and therefore are a payment. Paragraph 9.86 of the Explanatory Memorandum to the Taxation Laws Amendment Act (No. 3) 1998 provides that: This provision allows the Commissioner to take into account such things as a payment from the interposed entity which was, in whole or in part, the arm's length consideration for the sale of goods or the provision of services to the interposed entity by the shareholder or associate. Taxation Determination TD 2011/16 Income tax: Division 7A - payments and loans through interposed entities - factors the Commissioner will take into account in determining the amount of any deemed payment or notional loan arising under section 109T of the Income Tax Assessment Act 1936 states : 41. Subsections 109V(2) and 109W(2) do not exhaustively describe the factors which the Commissioner can consider when quantifying the payment or loan. In particular, it is relevant to have regard to the commerciality of the loan from the private company to the interposed entity outlines the factors the Commissioner will consider at paragraph 2. Relevantly, paragraph 2(a) states: (a) the amount that an interposed entity referred to in subsection 109T(1) (an 'interposed entity') loaned or paid the target entity referred to in that subsection (target entity) under the arrangement described in that subsection (the arrangement); (b) how much (if any) of the amount loaned or paid to the target entity by an interposed entity under the arrangement the Commissioner believes represented arm's length consideration payable to the target entity by the private company or an interposed entity for anything (other than its right to receive repayment of the loan and any relevant interest); ... (d) the extent to which any actual payments made as part of the arrangement were converted into loans pursuant to subsection 109D(4A) that have been repaid by that time; ... (f) the extent to which any payment made from the private company to an interposed entity as part of the arrangement was converted, pursuant to subsection 109D(4A) into a section 109N compliant loan by that time; (g) the extent to which any actual loans made as part of the arrangement would be covered by section 109M (loans in the ordinary course of the private company's business made on its usual terms applicable to arm's length parties); and (h) the extent to which the above factors reflect genuine transactions that are not designed to avoid the application of Subdivision E otherwise than as envisaged within the scheme of Division 7A (such as making a section 109N compliant loan to an entity that has an intention and capacity to repay a loan [in respect of which to the extent expected at the time when the Commissioner is determining the amount of deemed payment or notional loan, appropriate minimum yearly repayments have been made] or genuinely and in substance repaying loans in a manner that would not attract section 109R if it applied). In addition to the relevant factors above, the Commissioner may, in appropriate cases, consider (having regard to the intended purpose of Division 7A) the extent to which tax is otherwise payable because of the structure used in the arrangement (see paragraph 81 of TD 2018/13). Subsection 109V(2) of the ITAA 1936 provides the Commissioner with broad discretion on what constitutes consideration for anything that may be provided by the target entity and the private company. The above ATO view further states that regard must be had to the commerciality of the loan or payment from the private company to the target entity. The payment from Private Company to UT, which will be used to subscribe for units in UT1, UT2 and UT3 at market value is commercial in nature because the unit subscription amounts will be used to capitalise the unit trusts to invest in real property developments and the amount paid for the subscription of units in the unit trusts will be at market value. Consequently, the amount of the payment of the payment taken to have been paid by Private Company to UT1, UT2 and UT3 for the purpose of section 109V of the ITAA 1936 will be nil. Therefore, for the purposes of section 109T of the ITAA 1936, no amount of the payment is deemed to be a dividend under section 109C of the ITAA 1936.