Private ruling: Division 7A
Published: March 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the forgiveness of loans, advanced by the trust to the deceased during the deceased's lifetime, result in a dividend being taken to have been paid under Section 109XB of the Income Tax Assessment Act 1936 (ITAA 1936) to the Executor of the deceased estate? | A1: Yes.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. The trustee of the trust advanced loans to a shareholder of a private company beneficiary during the lifetime of the shareholder. The shareholder has subsequently deceased. The loans are still outstanding. The trust has unpaid present entitlements to the company beneficiary. The required minimum yearly repayments on the loans were made. The trustee is contemplating the forgiveness of the outstanding loan amounts.

Relevant legislative provisions: Administration Act 1903 Section 8 | Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1936 Subdivision EA

Reasons for decision: Summary: Division 7A is an anti-avoidance or 'integrity' provision, directed to ensuring that disguised or informal distributions of company profits to shareholders or their associates should be included in the assessable income of the shareholders or associates. Division 7A includes Subdivision EA which operates where a private company beneficiary has an unpaid present entitlement and the trustee of the trust makes a relevant payment or loan to, or forgives a debt owing by, a shareholder (or their associate) of the private company. If section 109XB of the ITAA 1936 applies in respect of the payment, loan or debt forgiven, an amount is included as if it were a dividend in the assessable income of the shareholder (or their associate). The amount of the deemed dividend is determined under section 109XB of the ITAA 1936 by assuming that the transactions had been carried out by a private company (the notional company) and that the shareholder (or their associate) of the private company were a shareholder (or their associate) of the notional company. The amount of the deemed dividend for tax purposes is the amount of the debt forgiven, subject to the company's distributable surplus. Subsection 109XA(3) of the ITAA 1936 is the provision which applies to forgiven debts. It causes section 109XB of the ITAA 1936 to apply where: (a) a non-corporate shareholder (or associate) of a private company beneficiary owes a debt to the trustee; (b) the private company is, or becomes, presently entitled to an amount from the net income of the trust estate; and (c) the present entitlement remains unpaid before the earlier of the due date for lodgment and the actual date of lodgment of the trust return for the income year in which the forgiveness takes place. Under subsection 109F(1) a private company is taken to pay a dividend to an entity at the end of the private company's year of income if all or part of a debt the entity owed the private company is forgiven in that year and either: (a) the amount is forgiven when the entity is a shareholder in the private company, or an associate of such a shareholder; or (b) a reasonable person would conclude (having regard to all the circumstances) that the amount is forgiven because the entity has been such a shareholder or associate at some time. In your case, the trustee is contemplating forgiveness of an outstanding loan amount in relation to a loan advanced during the lifetime of the deceased, where the trust has an unpaid present entitlement to the company. Using the same principles that apply to the operation of Section 109F of the ITAA 1936, the issue for determining whether Division 7A applies is whether the executor (legal personal representative) administering the shareholder's estate is a shareholder of the company (or an associate of a shareholder) when the debt is forgiven. Following the Grant of Probate of the individual's will, section 8 of the Administration Act 1903 deems all real and personal property of the deceased (including title to the shares) to have passed to and become vested in the executor as from the death of the individual. The deceased's property (including title to the shares) is held absolutely by the legal personal representative for the duration of the administration of the shareholder's estate ( Official Receiver In Bankruptcy v. Schultz [ 1990 ] HCA 45 ; ( 1990) 170 CLR 306 ). Following the Grant of Probate, the legal personal representative immediately assumes liability to pay the deceased's debts (including the debt owed by the deceased to the private company (the amalgamated loan)) (Certoma, GL 2010, The Law of Succession in New South Wales , 4th edn Thomson Reuters, Sydney, p. 304). As the title to the shares in the private company passed to the deceased's legal personal representative upon the death, the legal personal representative is the relevant shareholder for the purposes of paragraph 109F(1)(a) of the ITAA 1936. As section 109XB of the ITAA 1936 modifies the application of the Division 7A provisions to include trusts, it follows that if the company forgives the loan that is now owed by the legal personal representative shareholder, the trust will be taken to have paid a dividend to the legal personal representative shareholder in the relevant income year.