Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 9 - Non-commercial loans
Outline of chapter
9.1 Part 1 of Schedule 9 to this Bill corrects a technical defect in Subdivision EA of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with loans from trustees to shareholders of corporate beneficiaries. The new rules will mean that a loan from a trustee to a shareholder of a corporate beneficiary will not be treated as a deemed dividend if the loan is repaid before the earlier of the due date for lodgement or the date of lodgement of the trust's income tax return for the year in which the loan is made.
9.2 Part 2 of Schedule 9 to this Bill amends Division 7A to allow a loan from a private company to be repaid or put on a commercial footing before the 'lodgement day' in order to avoid the loan being treated as a deemed dividend. The 'lodgement day' is the earlier of the due date for lodgement and the date of lodgement of the private company's income tax return for the income year in which the loan is made.
9.3 All references to legislative provisions in this chapter are references to the ITAA 1936 unless otherwise stated.
Context of amendments
Treatment of loans from trustees
9.4 On 12 December 2002, the Treasurer announced in Press Release No. 081 that the Government would amend section 109UB which dealt with distributions from trusts. Subdivision EA was subsequently introduced as part of Tax Laws Amendment (2004 Measures No. 1) Act 2004 to replace section 109UB. This Act received Royal Assent on 29 June 2004 and applies to payments, loans and debts forgiven on or after 12 December 2002.
9.5 Broadly speaking, a deemed dividend will arise under Subdivision EA where a private company is presently entitled to income of the trust, but that income has been paid to a shareholder of that private company in the form of a payment, loan or forgiven debt.
9.6 As the law is currently drafted, where a trustee makes a loan to a shareholder of a corporate beneficiary (or their associate), the deemed dividend rules will not apply if the loan is put on a commercial footing before the earlier of the due date for lodgement and the date of lodgement of the trustee's return of income for the year of income of the trust in which the loan was made.
9.7 Due to a technical oversight, the same extension of time does not apply in relation to the repayment of a loan from a trustee to a shareholder of a corporate beneficiary (or their associate). This means that, without the current amendment, if a loan is not repaid by the end of the income year in which the loan is made the loan will be a deemed dividend for the purposes of Division 7A. This was not the intention of the amendments. The amendments to section 109XC in Part 1 of this Bill will overcome this technical deficiency.
Treatment of loans from private companies
9.8 Changes to the treatment of loans from private companies were announced as part of the small business measures within the 2004-05 Budget. These changes will align the treatment of loans to shareholders of private companies, with loans from trustees to shareholders of corporate beneficiaries.
Summary of new law
Treatment of loans from trustees
9.9 The new rules in Part 1 of Schedule 9 to this Bill will allow a loan from a trustee to a shareholder (or their associate) of a private company, to be repaid before the earlier of the due date for lodgement or lodgement of the trust's income tax return for the year in which the loan is made, in order to avoid the loan being treated as a deemed dividend for the purposes of Division 7A.
Treatment of loans from private companies
9.10 The new rules in Part 2 of Schedule 9 to this Bill will allow a loan from a private company to a shareholder (or their associate), to be repaid or put on a commercial footing before the earlier of the due date for lodgement or lodgement of a private company's income tax return for the year in which the loan is made, in order to avoid the loan being treated as a deemed dividend for the purposes of Division 7A.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| If a shareholder of a private company (or their associate) repays a loan from a trustee before the earlier of the due date for lodgement or the lodgement of the trust's income tax return for the year in which the loan was made, the loan will not be a deemed dividend. | A shareholder of a private company (or their associate) must repay a loan from a trustee prior to the end of the trust's year of income for that particular year, for the loan not be a deemed dividend. |
| If a shareholder (or their associate) repays a loan from a private company or puts the loan on a commercial footing before the earlier of the due date for lodgement or the lodgement of the private company's income tax return for the year in which the loan is made, the loan will not be a deemed dividend. | A shareholder (or their associate) has to repay a loan from a private company or put the loan on a commercial footing before the end of the private company's year of income for the year in which the loan was made, for the loan not to be a deemed dividend. |
Detailed explanation of new law
Treatment of loans from trustees
9.11 Where a loan is repaid before the earlier of the due date for lodgement and the lodgement of the trust's return of income for the year which the loan was made, it will not be treated as a deemed dividend. [Schedule 9, Part 1, item 1, subsection 109XC(2A)]
9.12 New subsection 109XC(2A) will only apply to loans made from 12 December 2002 to the end of the income year in which this Bill receives Royal Assent. Amendments made to section 109D in Part 2 of this Bill make new subsection 109XC(2A) redundant from the income year that begins after this Bill receives Royal Assent.
9.13 Consequential amendments to subsections 109E(3) and 109N(1), discussed in paragraph 9.17, make current subsections 109XC(3) and (5) redundant. [Schedule 9, Part 2, item 11]
Treatment of loans from private companies
9.14 Part 2 of Schedule 9 to this Bill amends Division 7A to allow a loan from a private company to a shareholder (or their associate) to be repaid or put on a commercial footing before the private company's 'lodgement day' for that income year in order to avoid the loan being treated as a deemed dividend. [Schedule 9, item 4, paragraph 109D(1)(b)]
9.15 The 'lodgement day' for a private company's year of income is the earlier of:
- •
- the due date for lodgement of the private company's return of income for the year of income; and
- •
- the date of lodgement of the private company's return of income for the year of income.
[Schedule 9, Part 2, items 3, 5 and 6, section 109D]
9.16 Where an amount of the loan has not been repaid before the lodgement day for the year in which the loan was made, that amount is deemed to be a dividend paid by the private company to the shareholder. [Schedule 9, Part 2, item 4, subsection 109D(1AA)]
9.17 Consequential amendments are also made to subsections 109E(3) and 109N(1) and section 109ZD to reflect the extended time given to shareholders (or their associates) to repay the loan or put it on a commercial footing. These amendments ensure that a deemed dividend will not arise if a loan is repaid or put on a commercial footing before the lodgement day. [Schedule 9, Part 2, items 7 to 10 and 12]
Application and transitional provisions
9.18 The amendment made by Part 1 of Schedule 9 to this Bill applies to loans made on or after 12 December 2002 (the application date for the amendments introduced in Tax Laws Amendment (2004 Measures No. 1) Act 2004). [Schedule 9, Part 1, item 2]
9.19 The amendments made by Part 2 of Schedule 9 to this Bill apply in relation to loans made in years of income that begin after the day this Bill receives Royal Assent. [Schedule 9, Part 2, item 13]