Private ruling: Division 7A - section 109C payment - section 109J exemption
Date of advice: 22 April 2026
Published: 13 July 2026
Ruling period: Year ended 30 June 20XY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the amounts paid by Corporate Unitholder to the Trust for the subscription of new units (New Units) in the Trust a payment for the purposes of section 109C of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: If the answer to Question 1 is yes, does the exemption in section 109J of the ITAA 1936 apply? | A2: Yes.

Relevant facts and circumstances: On DD MM 20XX, the Trust was established. It is an Australian resident trust and its trustee is the Trustee, an Australian resident company. The Trust was established to invest in fixed income and private equity in Australia. All units on issue in the trust comprise one class, with the same rights to income and capital and each unit has equal value. All units in the Trust are held by Corporate Unitholder, which has been the only unitholder since the trust's establishment. Corporate Unitholder is an Australian resident company. It is owned by the Trustee as separate trustee for Operating Trust, an Australian resident discretionary trust. The Trust and Operating Trust are associates. Operating Trust invests in private businesses, listed securities, managed funds and in property finance syndicates. On DD MM 20XX, the Trustee invested $x in a month term deposit with Commonwealth Bank of Australia, i.e. on commercial terms. This was funded by a loan from the Corporate Unitholder. There is no loan agreement. This loan was repaid by the issue of units in the Trust to the Corporate Unitholder on DD MM 20XX. There is no unitholder agreement. The Corporate Unitholder subscribed for $x of units with a subscription date of DD MM 20XX (New Units). The subscription price owing by the Corporate Unitholder to the Trust for the New Units was set off against the outstanding loan owing by the Trust to the Corporate Unitholder. Under the terms the Trust Deed, which requires the trustee to issue new units at the Issue Price, the Trustee calculated the Issue Price of each of the New Units as $x. This was calculated as Net Asset Value of $x divided by the number of units on issue, being n. As a result, x New Units were issued to the Corporate Unitholder. The Net Asset Value of the Trust on DD MM 20XX (prior to the issue of the new units) was $x. The number of units on issue was n so the Issue Price was $y i.e. $x divided by n. On DD MM 20XX, the Corporate Unitholder paid $x cash to the Trust for the issue of the New Units in the Trust. Balance sheets for the Trust as at 30 June 20XX immediately before and after the issue of New Units on DD MM 20XX, and as at DD MM 20XY are set out below. The only item in the profit and loss is interest received on the term deposit. Before issue After issue 30/06/20XX DD MM 20XX DD MM 20XX DD MM 20XY Cash on hand $X $X $X $X Term deposit $X $X $X Loan from Corporate Unitholder Pty Ltd $X Net assets $X $X $X $X Issued capital $X $X $X $X Retained earnings $X $X $X Total equity $X $X $X $X The Trust Deed Trust Deed was executed on DD MM 20XX. The Trust is a unit trust. However, in limited circumstances, under the Trust Deed, the Trustee may, subject to the unanimous consent of all unitholders, distribute some or all capital gains derived by the Trust to the Beneficiaries. The Trust Deed requires unanimous unitholder consent before the trustee can exercise powers that impact upon any rights to income or capital that a unitholder has in the Trust, including: • issuing additional units at the Issue Price; • terminating the trust; • redeeming units; • accumulating any part of net income; • distributing capital gains to one or more of the Beneficiaries; and • varying the trust deed. Consistent with the terms of fixed public unit trusts, Issue Price and Redemption Price are both defined as the Net Asset Value of the Trust divided by the total number of Units on issue on the Relevant Date. Net Asset Value is defined as the value of the assets of the Trust less the liabilities as determined by the Trustee applying generally accepted Australian accounting principles. Relevant Trust Deed clauses Issue Price is defined in the Trust Deed as the Net Asset Value of the Trust on the date of issue dividend by the number of units on issue on the date of issue of the new units. Net Asset Value is defined as the value of the assets of the Trust less the liabilities as determined by the Trustee applying generally accepted Australian accounting principles. Clause x states that the Trustee may, with the unanimous approval of all the Unit Holders, issue additional Units at the Issue Price. Clause x states that the Trustee may at any time and from time to time before termination of the Trust, with the unanimous consent of all the Unit Holders, redeem all or any number of Units for the Redemption Price which shall be payable in accordance with the provisions of clause x of this Deed. Clause x states that the Redemption Price payable by the Trustee to a Unit Holder may be satisfied by: (a) applying any cash of the Trust; (b) applying any other assets for the time being of the Trust; (c) setting off all or any part of the Redemption Price against any liability owing or which may be owing by the Unit Holder to the Trust; (d) crediting all or any part of the Redemption Price to a loan account in favour of the Unit Holder on such terms and conditions as mutually agreed between the Trustee and the Unit Holder; (e) creating or issuing other Units in the Trust in substitution for the Units to be redeemed in accordance with the provisions of this Deed; (f) any other manner as may be agreed between the Trustee and all the Unit Holders; or (g) any combination of the above. On DD MM 20XX, the Trust Deed was amended by deed of variation in line with clause x of the Deed.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 109C | Income Tax Assessment Act 1936 section 109J | Income Tax Assessment Act 1936 subsection 272-5(2) of Schedule 2F

Reasons for decision: Summary: Yes. The amounts paid to the Trust for the New Units is a payment for the purposes of section 109C of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 109C(3) of the ITAA 1936 provides that, for the purposes of Division 7A, payment to an entity means: (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. Payment to an entity includes the provision of an asset for use by the entity. The subscription by the Corporate Unitholder for the New Units issued by the Trust created a legally enforceable contractual obligation on the part of the Corporate Unitholder to pay the consideration for those units to the Trust. The consideration was a fixed amount per unit determined by the Trustee in accordance with clause x of the Trust Deed, and as specified in the unit applications and unit certificates that were issued. On DD MM 20XX, the Corporate Unitholder paid $x in cash to the Trust for the New Units. This is considered a payment under paragraph 109C(3)(a) of the ITAA 1936. | Detailed Reasoning - Question 2: If the answer to Question 1 is yes, does the exemption in section 109J of the ITAA 1936 apply? | Summary: Yes. Section 109J of the ITAA 1936 applies to the subscription payment made for the New Units such that the Corporate Unitholder is not taken under section 109C of the ITAA 1936 to pay a dividend to the Trust at the time it paid $5,000 for the New Units. It is not considered that this amount is more than would have been required to discharge the obligation in arm's length dealings. | Detailed Reasoning - Detailed reasoning: Section 109J of the ITAA 1936 provides 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. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 3) 1998 discusses section 109J and states at paragraph 9.49: 9.49 An amount paid to discharge a pecuniary obligation owed by a private company to a shareholder or associate will not be treated as a dividend to the extent that the payment is not more than the amount the pecuniary obligation would have been if the private company and shareholder or associate had been dealing with each other at arm's length [new section 109J]. This section ensures that such commercial dealings are not unfairly taxed and that, for example, disguised distributions are not made by inflating the amount of a debt owed to a shareholder or associate by a private company. Taxation 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? states at paragraph 78 that 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. Fixed trusts, the 'savings rule' and indefeasible interest Subsection 272-5(2) of Schedule 2F to the ITAA 1936 provides that if: (a) a person holds units in a unit trust; and (b) the units are redeemable or further units are able to be issued; and (c) if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and (d) if the units are not listed as mentioned in paragraph (c) - the units held by the person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue; then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person ' s interest, as a unit holder, in the income or capital of the unit trust is defeasible. Practical Compliance Guideline PCG 2016/16 Fixed entitlements and fixed trusts discusses market valuation of trusts and, at paragraph 18, the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936. It notes that unitholders' interests in a unit trust are not defeasible merely because a trustee has power to redeem or issue unlisted units for a value determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles. Paragraph 19 notes that the 'savings rule' is satisfied where units are issued for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer, but which nevertheless is accurate. Application to your circumstances The pecuniary obligation for the purposes of section 109J of the ITAA 1936 was that the Corporate Unitholder was required to make a payment for its subscription for the New Units in the Trust. 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 Division 7A loan or payment. The Commissioner acknowledges in TD 2018/13 that a subscription for units by a company in a related party unit trust is an ordinary commercial transaction. The amount of the pecuniary obligation was the price to subscribe for the units in the Trust as determined by the Trustee in accordance with clause x of the Trust Deed. The unit price was calculated as the Net Asset Value of the Trust divided by the total number of Units on issue on the Relevant Date. The Net Asset Value of the Trust is defined to be the value of the assets of the Trust less the liabilities as determined by the Trustee applying generally accepted Australian accounting principles. The determination of the issue price of the New Units by reference to the Net Asset Value is consistent with the 'savings' rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936; the Commissioner's approach in PCG 2016/16; and what arm's length investors would pay for units in an investment trust. The amount paid by the Corporate Unitholder was not more than what would have been required to discharge the obligation, had the Corporate Unitholder and the Trust been dealing with each other at arm's length. This is because an arm's length investor would be expected to pay the same price. In your circumstances, section 109J of the ITAA 1936 applies to the subscription payment made for the New Units such that the Corporate Unitholder is not taken under section 109C of the ITAA 1936 to pay a dividend to the Trust at the time it paid $5,000 for the New Units. It is not considered that this amount is more than would have been required to discharge the obligation in arm's length dealings.