Private ruling: Assessable income and dividends
Published: October 2014
Ruling period: 1 July 2011 - 30 June 2025
Date scheme commenced: 1 July 2011

Ruling: Q1: Would, as a result of the: a) loan from Company X to Company A; b) the Application of the Funds by Company A; c) loan from Company X to Company B; d) the Application of the Funds by Company B; e) loan from Company X to Company C; or f) The Application of the Funds by Company C; there be an amount taken to be a dividend from Company X pursuant to Division 7A of the Income Tax Assessment Act 1936 and, as a consequence, a debit to that entity's franking credit account pursuant to section 205-30 of Income Tax Assessment Act 1997 ? | A1: No | Q2: Will subsection 159GQ(2) of Division 16E of the Income Tax Assessment Act 1936 operate to include an amount in assessable income of Company X in relation to the loan(s) to Companys' A, B and C? | A2: No | Q3: Does section 230-15 of the Income Tax Assessment Act 1997 operate such that an amount will be included in the assessable income of Company X for any interest that may be payable to it under the loan(s) to Companys' A, B and C? | A3: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Background Company X was one of several entities involved in a business founded by Entity 1 and Entity 2. The directors of X are Entity 1 and Entity 3. Company X has issued capital of a number of shares, some of which are held by Entity 1 and the remainder by Entity 2. Entity 1 and Entity 2 are associated with Entity 3, Entity 4 and Entity 5. Entity 1 and Entity 2 intend that the relevant Entities will ultimately benefit from their wealth. Entity 1 and Entity 2 have decided to provide a share of capital to three companies, each of which is controlled by one of the entities. The Companies Company A is incorporated. That entity has issued capital of ordinary shares: a. a number of which is held by Entity 4; and, b. with the remaining held by Trust 4. The sole director of Company A is Entity 4. Company 4, is trustee for Trust 4. Company 4 is incorporated. The sole director and shareholder of Company 4 is Entity 4. Company B is incorporated. That entity has issued capital of ordinary shares: a. a number of which is held by Entity 3; and, b. with the remaining held by Trust 3. The sole director of Company B is Entity 3. Company C is incorporated. That entity has issued capital of ordinary shares, a number of which are held by Entity 1 and Entity 2. The sole director of Company C is Entity 5. Company 5, is trustee for Trust 5. Company 5 is incorporated. The sole director and shareholder of Company 5 is Entity 5. The Loan to Company A $ was advanced from Company X to Company A. The amount was advanced on oral terms (the Loan ). However, those oral terms are recorded in a yet to be executed written loan agreement (the Loan Agreement ). The Loan Agreement provides that the principal is not repayable until it is demanded by the Lender or a Demand Notice is issued. That is, the Loan Principal is not repayable until called upon by Company X or until a demand is issued. The Loan Principal is the amount advanced and no further amounts are intended to be advanced. Under the Loan Agreement, Money Owing includes the Loan Principal and other amounts, including interest. The Loan Principal is advanced interest free, except in certain circumstances where Company X has the discretion to charge or issue a demand. Company X can also issue an Interest Notice seeking interest or it can, see repayment of the Loan Principal and all other Money Owing. Interest can be payable from the Advance Date, which means the date upon which any part of the Loan Principal was first advanced to the company's. The Application of the Funds The company's all have applied the funds advanced to it to savings accounts and term deposits.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 7A. | Income Tax Assessment Act 1936 Section 109K | Income Tax Assessment Act 1936 Section 159GP | Income Tax Assessment Act 1936 Section 159GQ | Income Tax Assessment Act 1997 Subsection 205-30(1) | Income Tax Assessment Act 1997 Subsection 960-120 | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: Subsection 205-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that "The following table sets out when a debit arises in the *franking account of an entity and the amount of the debit. The debit is called a franking debit ." The table sets out several items, none of which are applicable. If one of those items was to be relevant, it would likely be Item 1. That item provides that if "the entity franks a distribution" there is a debit to the company's franking account. Subsection 995-1(1) of the ITAA 1997 provides that "In this Act, except so far as the contrary intention appears: … distribution , by a corporate tax entity, has the meaning given by section 960-120." Subsection 960-120(1) of the ITAA 1997 provides that "what constitutes a distribution " by a company is "a dividend, or something that is taken to be a dividend, under this Act": Item 1. Section 109K of the Income Tax Assessment Act 1936 (ITAA 1936) disregards the loan from Company X to Company A, Company B and Company C as a deemed dividend. Accordingly, there is no distribution for the purpose of a franking debit. Section 159GQ of ITAA 1936 determines the tax treatment of the holder of a qualified security. Subsection (1) provides that: "If a taxpayer holds a qualifying security for all or part of a year of income, the effect on the taxpayer's taxable income is determined by working out the accrual amount (see section 159GQB) for each accrual period (see section 159GQA) in the year of income and then summing the accrual amounts." A 'qualifying security' is defined in section 159GP of ITAA 1936 as any security that, in addition to other requirements, has an 'eligible return'. Subsection 159GP(3) defines the term 'eligible return': 'For the purposes of this Division, there shall be taken to be an eligible return in relation to a security if at the time the security was issued it is reasonably likely, by reason that the security was issued at a discount, bears deferred interest or is capital indexed or for any other reason, having regard to the terms of the security, for the sum of all payments (other than periodic interest payments) under the security to exceed the issue price of the security, and the amount of the eligible return is the amount of the excess." [emphasis added] At the time the Loan is made, neither the borrower (Company A, Company B or Company C, as the case may be) nor the lender (Company X) knows from the outset whether any return will be made to the lender as it depends on whether a Default occurs, further, whether Company X will issue an Interest Notice, which is discretionary. There is no 'eligible return' and, therefore, no qualifying security. Therefore, for these reasons, subsection 159GQ(2) of the ITAA 1936 will have no application. Division 230 of the ITAA 1997 provides for the taxation of financial arrangements. Subsection 230-15(1) provides that "Your assessable income includes a gain you make from a financial arrangement." However, even if that subsection of the Division would otherwise apply to any gains relating to the loans to Companys' A, B or C, it does not apply to gains that are subject to exceptions under Subdivision 230-H. This includes where subsection 230-455(1) is satisfied. That subsection is satisfied here. Company X is an entity of the kind identified in sub-paragraph 230-455(1)(a)(iv), so is required to satisfy the requirements in subsection (4): paragraph 230-455(1)(d). Subsection 230-455(4) sets certain requirements for aggregated turnover, the value of financial assets, and the value of assets, which are met in this case. Accordingly, section 230-15 will not include an amount in Company X assessable income.

Reasons for decision: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.