Taxation Laws Amendment Act (No. 3) 1998 (47 of 1998)
Schedule 8 Distributions from private companies
Part 1 Income Tax Assessment Act 1936
2 After Division 7 of Part III
Insert:
Division 7A - Distributions to entities connected with a private company
Subdivision A - Overview of this Division
109B Simplified outline of this Division
The following is a simplified outline of this Division:
This Division treats 3 kinds of amounts as dividends paid by a private company:
• amounts paid by the company to a shareholder or shareholder's associate (see section 109C);
• amounts lent by the company to a shareholder or shareholder's associate (see sections 109D and 109E);
• amounts of debts owed by a shareholder or shareholder's associate to the company that the company forgives (see section 109F).
This treatment makes the amounts assessable income of the shareholder or associate (under section 44) and provides a basis for reducing the company's franking account credit (under section 160AQCNC).
However, some payments, loans and forgiven debts are not treated as dividends. (See Subdivisions C and D.)
An amount may be treated as a dividend even if it is paid or lent by the company to the shareholder or associate through one or more interposed entities. (See Subdivision E.)
If the total of the amounts is more than the company's distributable surplus, only the part of the total equal to the distributable surplus is treated as dividends. (See section 109Y.)
Subdivision B - Private company payments, loans and debt forgiveness are treated as dividends
109C Payments treated as dividends
When private company is taken to pay a dividend
(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 the private company pays an amount to the entity during the year and either:
(a) the payment is made 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 payment is made because the entity has been such a shareholder or associate at some time.
Note 1: Some payments do not give rise to dividends. See Subdivision D.
Note 2: A private company is treated as making a payment to a shareholder or shareholder's associate if an interposed entity makes a payment to the shareholder or associate. See Subdivision E.
Amount of dividend
(2) The dividend is taken to equal the amount paid, subject to section 109Y.
Note: Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.
What is a payment to an entity?
(3) In this Division, 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.
Loans are not payments
(3A) However, a loan to an entity is not a payment to the entity.
Value of payment by transfer of property
(4) The amount of a payment consisting of a transfer of property is the amount that would have been paid for the transfer by parties dealing at arm's length less any consideration given by the transferee for the transfer. (The amount of a payment is nil if the consideration given by the transferee equals or exceeds the amount that would have been paid at arm's length for the transfer.)
109D Loans treated as dividends
Loans treated as dividends in year of making
(1) A private company is taken to pay a dividend to an entity at the end of one of the private company's years of income (the current year ) if:
(a) the private company makes a loan to the entity during the current year; and
(b) the loan is not fully repaid by the end of the current year; and
(c) Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and
(d) either:
(i) the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made; or
(ii) a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the entity has been such a shareholder or associate at some time.
Note 1: Some repayments cannot be counted for the purpose of this subsection. See section 109R.
Note 2: A private company is treated as making a loan to a shareholder or shareholder's associate if an interposed entity makes a loan to the shareholder or associate. See Subdivision E.
Loans treated as dividends in year following that of making
(1A) A private company is taken to pay a dividend to an entity at the end of the private company's year of income (the current year ) if:
(a) the private company made a loan to the entity during the previous year of income; and
(b) it made the loan in the course of a winding-up of the private company by a liquidator; and
(c) the loan is not fully repaid by the end of the current year; and
(d) either:
(i) the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made; or
(ii) a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the entity has been such a shareholder or associate at some time.
Subdivision D (other than section 109R) does not apply to loans covered by this subsection.
Amount of dividend
(2) The amount of the dividend taken to have been paid is the amount of the loan that has not been repaid at the end of the current year, subject to section 109Y.
Note: Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.
What is a loan?
(3) 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.
In which year of income is a loan made?
(4) For the purposes of this Division, a loan is made to an entity at the time the amount of the loan is paid to the entity by way of loan or anything described in subsection (3) is done in relation to the entity.
Loans made before 4 December 1997
(5) If the terms of a loan made before 4 December 1997 are varied on or after that day by extending the term of the loan or increasing its amount, this Division applies to the loan as if it were made on the new terms when the variation occurred.
109E Amalgamated loan from a previous year treated as dividend if minimum repayment not made
Amalgamated loan treated as dividend in first year in which payment is less than minimum yearly repayment
(1) A private company is taken to pay a dividend to an entity at the end of one of the private company's years of income (the current year ) if:
(a) the private company made an amalgamated loan to the entity in an earlier year of income; and
(b) the amalgamated loan is not repaid at the end of the current year; and
(c) the current year is the first year of income in which:
(i) the amount paid to the private company during the year of income in relation to the amalgamated loan is less than the minimum yearly repayment of the amalgamated loan worked out under subsection (5) for the year of income; and
(ii) section 109Q does not apply.
Note: The amalgamated loan does not give rise to a dividend for that year if the minimum yearly repayment is not made and the entity satisfies the Commissioner that treating the loan as a dividend would cause hardship. See section 109Q.
Amount of dividend
(2) The amount of the dividend is taken to be the amount of the amalgamated loan that has not been repaid at the end of the current year, subject to section 109Y.
Note: Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.
What is an amalgamated loan?
(3) For the purposes of this Division, a private company is taken to make a loan (the amalgamated loan ) to a single entity during a year of income if the private company makes one or more loans ( constituent loans ) to the entity during the year, each of which:
(a) is not fully repaid at the end of the year; and
(b) would cause the company to be taken under section 109D to pay a dividend to the entity at the end of the year, apart from section 109N; and
(c) has the same maximum term for the purposes of that section.
The amount of the amalgamated loan is the sum of the amounts of the constituent loans that have not been repaid at the end of the year of income in which the amalgamated loan is made.
Payments in relation to constituent loans treated as payments in relation to amalgamated loan
(4) For the purposes of this Division, a payment to the private company in relation to a constituent loan in a year of income after the one in which the constituent loan was made is taken to be a payment in relation to the amalgamated loan that takes account of the constituent loan.
Minimum yearly repayment
(5) The minimum yearly repayment of an amalgamated loan for a year of income is the amount worked out using the formula in subsection (6). However, the minimum yearly repayment of an amalgamated loan for a year of income is the amount worked out under the regulations, if they provide for working it out.
Formula for minimum yearly repayment
(6) The formula for the minimum yearly repayment for a year of income is:
where:
current year's benchmark interest rate is the benchmark interest rate for the year of income for which the minimum yearly repayment is being worked out.
remaining term is the difference between:
(a) the number of years in the longest term of any of the constituent loans that the amalgamated loan takes account of; and
(b) the number of years between the end of the private company's year of income in which the loan was made and the end of the private company's year of income before the year of income for which the minimum yearly repayment is being worked out;
rounded up to the next higher whole number if the difference is not already a whole number.
Note: Section 109R provides that certain payments relating to a loan are not to be taken into account for the purposes of working out the minimum yearly repayment.
Benchmark interest rate used to work out how much of a payment relating to amalgamated loan is a repayment
(7) Work out the amount of an amalgamated loan repaid by the end of a year of income on the basis that interest is payable on the balance of the loan from time to time in a year of income at a rate equal to the benchmark interest rate for the year of income.
109F Forgiven debts treated as dividends
Forgiven debt treated as dividend
(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.
Note: In some cases forgiving a debt does not give rise to a dividend. See section 109G.
Amount of dividend
(2) The amount of the dividend equals the amount of debt forgiven, subject to section 109Y.
Note: Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.
When is a debt forgiven?
(3) An amount of a debt is forgiven for the purposes of this Division if and when the amount would be forgiven under section 245-35 (except subsection 245-35(4)) of Schedule 2C, assuming the amount were a commercial debt for the purposes of Division 245 of that Schedule.
Note: Division 245 of Schedule 2C applies to forgiveness of certain commercial debts.
Discharge of debt by transfer of property is not forgiveness
(4) Despite subsection (3), an amount of debt is not forgiven for the purposes of this Division if the obligation to pay the amount is discharged by a payment to the creditor consisting of a transfer of property.
Note: Subsection 109C(4) explains how to work out the value of a payment consisting of a transfer of property.
Debt forgiveness by debt parking
(5) An amount of debt an entity (the debtor ) owes a private company is also forgiven for the purposes of this Division if:
(a) the private company assigns the right to receive payment of the amount to another entity (the new creditor ) who is either:
(i) an associate of the debtor; or
(ii) a party to an arrangement with the debtor about the assignment; and
(b) a reasonable person would conclude (having regard to all the circumstances) that the new creditor will not exercise the assigned right.
Debt forgiveness by failure to rely on obligation to pay
(6) An amount of debt an entity (the debtor ) owes a private company is also forgiven for the purposes of this Division if a reasonable person would conclude (having regard to all the circumstances) that the private company will not insist on the entity paying the amount or rely on the entity's obligation to pay the amount. (The amount is forgiven when a reasonable person would first reach that conclusion.)
Forgiveness of amalgamated loan debt
(7) If a private company forgives an amount of debt resulting from a constituent loan taken into account in working out the amount of an amalgamated loan under subsection 109E(3), the private company is taken to forgive the same amount of the debt resulting from the amalgamated loan.
This section operates on only the earliest debt forgiveness
(8) If the same debt is forgiven for the purposes of this Division at different times under different provisions of this section, this section operates on the first forgiveness only.
Example: Subsection (3) of this section provides that a debt is forgiven if it has not been paid by the time a statute of limitations prevents recovery of the debt. (It does this by applying subsection 245-35(2) of Schedule 2C.) The debt might already have been forgiven under subsection (6) of this section (because a reasonable person would have concluded earlier that the private company was not going to insist on payment). This section would apply to the forgiveness under subsection (6) but not the forgiveness under subsection (3).
Subdivision C - Forgiven debts that are not treated as dividends
109G Debt forgiveness that does not give rise to a dividend
Forgiveness of debt owed by company generally not treated as dividend
(1) A private company is not taken under this Division to pay a dividend because a debt owed to it by another company is forgiven.
Note: This does not apply to a debt owed by a company as trustee. (See section 109ZE.)
Forgiveness of debts under Bankruptcy Act not treated as dividends
(2) A private company is not taken under this Division to pay a dividend because a debt is forgiven because the debtor becomes a bankrupt or because of Part X of the Bankruptcy Act 1966.
Forgiveness of loan debt does not give rise to dividend if loan did give rise to dividend
(3) A private company is not taken under section 109F to pay a dividend at the end of a year of income because of the forgiveness of an amount of a debt resulting from a loan if, because of the loan, the private company is taken:
(a) under section 109D or 109E to pay a dividend at the end of that year or an earlier one; or
(b) under subsection 108(1) to pay a dividend on the last day of that year or an earlier one.
Commissioner may treat forgiveness as not giving rise to dividend
(4) A private company is not taken under this Division to pay a dividend because of the forgiveness of a debt owed by an entity if the Commissioner is satisfied that:
(a) the debt was forgiven because payment of the debt would have caused the entity undue hardship; and
(b) when the entity incurred the debt, the entity had the capacity to pay the debt; and
(c) the entity lost the ability to pay the debt in the foreseeable future as a result of circumstances beyond the entity's control.
Subdivision D - Payments and loans that are not treated as dividends
109H Simplified outline of this Subdivision
The following is a simplified outline of this Subdivision:
This Subdivision sets out rules about payments and loans that are not treated as dividends.
The following sorts of payments are not treated as dividends:
• payments of genuine debts (section 109J);
• payments to other companies (section 109K);
• payments that are otherwise assessable or that are specifically excluded from assessable income (section 109L).
The following sorts of loans are not treated as dividends:
• loans to other companies (section 109K);
• loans that are otherwise assessable (section 109L);
• loans made in the ordinary course of business on ordinary commercial terms (section 109M);
• loans that meet criteria for minimum interest rate and maximum term (section 109N);
• certain loans and distributions by liquidators (section 109NA);
• loans that are for the purpose of funding the purchase of certain shares or rights under an employee share scheme (section 109NB).
An amalgamated loan may not be treated as a dividend if the Commissioner is satisfied that doing so would cause undue hardship. (See section 109Q.)
This Subdivision also provides for some loan repayments and interest payments to private companies to be disregarded if they are made with the intention of borrowing a similar amount from a private company later. (See section 109R.)
109J Payments discharging pecuniary obligations not treated as dividends
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.
109K Inter-company payments and loans not treated as dividends
A private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan the private company makes to another company.
Note: This does not apply to a payment or loan to a company in its capacity as trustee. (See section 109ZE.)
109L Certain payments and loans not treated as dividends
(1) A private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan the private company makes to an entity, to the extent that the payment or loan would be included in the entity's assessable income apart from this Division (as it operates in conjunction with section 44).
(2) In addition, a private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan that the private company made to an entity to the extent that a provision of this Act (other than this Division) has the effect that the payment or loan is not included in the entity's assessable income even though it would otherwise be included.
109M Loans made in the ordinary course of business on arm's length terms not treated as dividends
A private company is not taken under section 109D to pay a dividend because of a loan made:
(a) in the ordinary course of the private company's business; and
(b) on the usual terms on which the private company makes similar loans to parties at arm's length.
109N Loans meeting criteria for minimum interest rate and maximum term not treated as dividends
Criteria
(1) A private company that makes a loan to an entity in one of the private company's years of income is not taken under section 109D to pay a dividend at the end of the year of income because of the loan if:
(a) the loan is made under a written agreement; and
(b) the rate of interest payable on the loan for years of income after the year in which the loan is made equals or exceeds the benchmark interest rate for the year; and
(c) the term of the loan does not exceed the term (the maximum term ) for that kind of loan worked out under subsection (3).
Benchmark interest rate
(2) The benchmark interest rate for the year of income is the Indicator Lending Rates - Bank variable housing loans interest rate last published by the Reserve Bank of Australia before the start of the year of income. However, the benchmark interest rate is the rate worked out under the regulations, if they provide for working it out.
Maximum term
(3) The maximum term is:
(a) 25 years for a loan if:
(i) 100% of the value of the loan is secured by a mortgage over real property that has been registered in accordance with a law of a State or Territory; and
(ii) when the loan is first made, the market value of that real property (less the amounts of any other liabilities secured over that property in priority to the loan) is at least 110% of the amount of the loan; and
(b) 7 years for any other loan.
However, the maximum term for a loan is the period worked out under the regulations, if they provide for working out the maximum term for that kind of loan.
Regulations may adopt rate as published from time to time
(4) Regulations made for the purposes of subsection (2) may apply, adopt or incorporate a rate published in an instrument after they are made or take effect, or a rate contained in an instrument from time to time, despite:
(a) subsection 49A(1) of the Acts Interpretation Act 1901; and
(b) paragraph 11(b) of the Legislative Instruments Act 1998.
109NA Certain liquidator's distributions and loans not treated as dividends
A private company is not taken under section 109C or subsection 109D(1) to pay a dividend because of a distribution or loan made in the course of the winding-up of the company by a liquidator.
Note: However, if such a loan is not fully repaid by the end of the following year of income, the company will be taken to have paid a dividend under subsection 109D(1A).
109NB Loans to purchase shares under employee share schemes not treated as dividends
(1) A private company is not taken under section 109D to pay a dividend because of a loan made solely for the purpose of enabling the shareholder or an associate of the shareholder to acquire qualifying shares or qualifying rights under an employee share scheme.
(2) Expressions used in this section that are defined in Division 13A have the same meaning as in that Division.
109P Amalgamated loans not treated as dividends in the year they are made
A private company is not taken under section 109D to pay a dividend because of an amalgamated loan it makes.
Note: An amalgamated loan may be treated as a dividend under section 109E.
109Q Commissioner may allow amalgamated loan not to be treated as dividend
(1) A private company is not taken under section 109E to pay a dividend at the end of one of its years of income (the current year ) because of an amalgamated loan to an entity if:
(a) the amount paid to the private company by the entity in the current year in relation to the loan is less than the minimum yearly repayment of the loan for the current year worked out under subsection 109E(5); and
(b) the entity satisfies the Commissioner that:
(i) that amount was less than the minimum yearly repayment because of circumstances beyond the entity's control; and
(ii) the entity would suffer undue hardship if the private company were taken under section 109E to pay a dividend to the entity at the end of the current year because of the loan.
(2) In deciding whether he or she is satisfied, the Commissioner must consider:
(a) the entity's capacity, at the end of the year of income in which the amalgamated loan was made, to repay the loan; and
(b) any circumstances that have reduced the entity's capacity to repay the loan; and
(c) whether the entity took all reasonable steps to make payments relating to the amalgamated loan during the current year equal to the minimum yearly repayment of the loan for the current year; and
(d) whether the entity has made payments relating to the loan as soon as possible after the current year equalling the difference between:
(i) the minimum yearly repayment for the current year; and
(ii) the amount of payments made during the current year relating to the loan.
109R Some payments relating to loans not taken into account
(1) 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 treat amounts of loans that have not been repaid as dividends); or
(b) the minimum yearly repayment for the loan under subsection 109E(5).
(2) A payment must not be taken into account if a reasonable person would conclude (having regard to all the circumstances) that when the payment was made the entity intended to obtain a loan from the private company of an amount similar to or larger than the payment.
(3) Subsection (2) does not apply to a payment made by setting off against an amount payable in relation to the loan:
(a) a dividend payable by the private company to the entity; or
(b) PAYE earnings payable by the private company to the entity; or
(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.
(4) Nor does subsection (2) apply to a payment made on behalf of the entity (the borrower ) by another entity paying to the private company an amount that:
(a) is payable by the other entity to the borrower; and
(b) is assessable income of the borrower for the year of income in which the payment was made or an earlier year of income.
Subdivision E - Payments and loans through interposed entities
109S Simplified outline of this Subdivision
The following is a simplified outline of this Subdivision:
This Subdivision allows a private company to be taken under Subdivision B to pay a dividend to an entity (the target entity ) if an entity interposed between the private company and the target entity makes a payment or loan to the target entity under an arrangement involving the private company.
This result is achieved by treating the private company as making a payment or loan of an amount determined by the Commissioner to the target entity (according to whether the interposed entity made a payment or loan to the target entity). (See sections 109V (for payments) and 109W (for loans).)
The arrangement must involve the private company and one or more interposed entities in making payments or loans or giving loan guarantees for the purpose of the target entity receiving a payment or loan from an interposed entity. (See sections 109T, 109U, 109UA and 109UB.)
If the target entity repays a fraction of the loan made by the interposed entity, the target entity is treated as repaying the same fraction of the loan taken to have been made by the private company. (See subsection 109W(3).)
Some provisions that prevent payments or loans from giving rise to dividends do not apply to payments or loans this Subdivision treats a private company as making. (See section 109X.)
109T Payments and loans by a private company to an entity through one or more interposed entities
(1) 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.
This section operates regardless of certain factors
(2) For the purposes of this section, it does not matter:
(a) whether the interposed entity made the payment or loan to the target entity before, after or at the same time as the first interposed entity received the payment or loan from the private company; or
(b) whether or not the interposed entity paid or lent the target entity the same amount as the private company paid or lent the first interposed entity.
This section does not operate if the payment or loan to the first interposed entity is treated as a dividend
(3) This Division does not operate as described in subsection (1) (and sections 109V and 109W) if the private company is taken under Subdivision B (as it applies apart from this Subdivision) to pay a dividend as a result of the payment or loan to the first interposed entity.
109U Payments and loans through interposed entities relying on guarantees
(1) This Division operates as if a private company makes a payment to an entity (the target entity ) as described in section 109V if:
(a) during a year of income the private company guarantees a loan made by another entity (the first interposed entity ); and
(b) a reasonable person would conclude (having regard to all the circumstances) that the private company gave the guarantee 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 that is a private company makes a loan to the target entity; or
(ii) another entity that is a private company interposed between the private company and the target entity makes a payment or loan to the target entity; and
(d) the amount of the payment or the loan is greater than the amount worked out using the formula:
Distributable surplus - Subsection 109Y(3) amount
(2) The amount of the payment from the private company to the target entity (as worked out under section 109V) is to be reduced by the amount worked out using the formula:
Distributable surplus - Subsection 109Y(3) amount
(3) In the formulas in paragraph (1)(d) and subsection (2):
distributable surplus means the distributable surplus (worked out under subsection 109Y(2)) for the interposed entity that made the payment or loan to the target entity for the year of income.
subsection 109Y(3) amount means the total of any amounts calculated under subsection 109Y(3) in relation to that interposed entity for the year of income (apart from as a result of the operation of this section).
This section operates regardless of certain factors
(4) For the purposes of this section, it does not matter:
(a) whether the interposed entity made the payment or loan to the target entity before, after or at the same time as the first interposed entity received the guarantee from the private company; or
(b) whether or not the interposed entity paid or lent the target entity the same amount as the private company guaranteed.
109UA Certain liabilities under guarantees treated as payments
(1) Section 109T operates as if one entity (the first entity ) makes a payment to a second entity if the first entity guarantees a loan the second entity makes to a third entity (the target entity ) and, as a result of the guarantee, the first entity has a liability (other than a contingent liability) to make a payment to the second entity.
Example: A private company guarantees a loan that a bank makes to a shareholder in the private company and the shareholder defaults on the loan. As a result, the company has a presently existing liability to make a payment to the bank. Section 109T operates as if the private company had made a payment to the bank, so the company is treated by section 109V as making a payment to the shareholder (because the bank is interposed between company and shareholder).
(2) The amount of the payment (as worked out under section 109V) is to be reduced by any amount treated as a dividend as a result of the operation of section 109U in relation to the payment or loan made by the interposed entity to the target entity.
(3) A private company is not taken under this Division to pay a dividend because of the operation of subsection (1) in relation to a guarantee if the Commissioner is satisfied that:
(a) the target entity would suffer undue hardship if the private company were taken to pay a dividend to the entity because of the liability; and
(b) when the target entity entered into the loan, the entity had the capacity to pay the loan.
(4) This section does not the limit the operation of section 109T.
109UB Certain trust amounts treated as loans
(1) If:
(a) a private company is, or has been, presently entitled to an amount from the net income of a trust estate; and
(b) the trustee has not paid the amount to the private company; and
(c) the trustee has made a loan to a shareholder of the private company, or an associate of such a shareholder after the time that the private company first became presently entitled to that amount;
the private company is taken to have made a loan to the shareholder or associate, at the time that the trustee made the loan.
(2) The amount of the loan is the lesser of the amount of the loan made by the trustee and the amount worked out using the formula:
Unpaid present entitlement - Previous notional loans
where:
unpaid present entitlement means the total amount to which the private company is, or has been, presently entitled that the trustee has not paid.
previous notional loans means the sum of amounts previously treated as a loan under this section as a result of its operation in relation to the unpaid present entitlement.
Some provisions preventing loan giving rise to dividend do not apply to notional loan
(3) Sections 109M and 109N do not apply to a loan that is taken to have been made under this section (so it must generally be taken into account for the purposes of working out whether the private company is taken under section 109D to have paid a dividend).
109V Amount of private company's payment to target entity through one or more interposed entities
Private company taken to pay if target entity is paid
(1) 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.
Determining the amount of the private company's payment
(2) 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).
109W Private company's loan to target entity through one or more interposed entities
Private company taken to lend if target entity receives loan
(1) 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.
Note: Subsection 109D(4) specifies the time at which a loan is made.
How big is the notional loan?
(2) 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).
Notional repayments of notional loan
(3) When working out whether the private company is taken under section 109D to pay a dividend as a result of the notional loan, and the amount of any such dividend, assume that the target entity repays an amount of the notional loan equal to the amount worked out using the formula:
Repayment made by target entity to lender * (Amount of notional loan/Amount actually lent to target entity)
where:
amount actually lent to target entity is the amount the interposed entity lent to the target entity.
repayment made by target entity to lender is the amount of any repayment made by the target entity of the loan the interposed entity made to the target entity.
109X Payment or loan may give rise to dividend despite Subdivision D
Payment or loan not affected by being made through interposed entity
(1) Despite sections 109K and 109L, a private company may be taken under section 109C or 109D to pay a dividend as a result of this Subdivision treating the private company as making a payment or loan to an entity (the target entity ), even if:
(a) the private company is treated that way because it makes a payment or loan to an entity that is a company interposed between the private company and the target entity; or
(b) some or all of the amount paid or lent by a private company to an entity interposed between the private company and the target entity is included in the interposed entity's assessable income for a year of income.
Some provisions preventing loan giving rise to dividend do not apply to notional loan
(2) Sections 109M and 109N do not apply to a notional loan under section 109W (so it must generally be taken into account for the purposes of working out whether the private company is taken under section 109D to have paid a dividend).
Subdivision F - General rules applying to all amounts treated as dividends
109Y Proportional reduction of dividends so they do not exceed distributable surplus
Reduction of amounts of dividends
(1) If, apart from this section, the sum of all the dividends a private company is taken under this Division to pay at the end of the year of income would be more than the company's distributable surplus for that year, the amount of each of those dividends is the amount worked out under subsection (3).
Distributable surplus
(2) A private company's distributable surplus for its year of income is the amount worked out using the formula:
Net assets - Non-commercial loans - Paid-up share value - Repayments of non-commercial loans
where:
net assets means the amount (if any), at the end of the company's year of income, by which the company's assets (according to the company's accounting records) exceed the sum of:
(a) the present legal obligations of the company to persons other than the company; and
(b) the following provisions (according to the company's accounting records):
(i) provisions for depreciation;
(ii) provisions for annual leave and long service leave;
(iii) provisions for amortisation of intellectual property and trademarks;
(iv) other provisions prescribed under regulations made for the purposes of this subparagraph.
If the Commissioner considers that the company's accounting records significantly undervalue its assets or overvalue its provisions, the Commissioner may substitute a value that the Commissioner considers is appropriate.
non-commercial loans is the total of any amounts the company is taken under section 108, 109D or 109E to have paid as dividends in earlier years of income as are shown as assets in the company's accounting records at the end of the year of income.
paid-up share value is the sum of:
(a) the amounts paid up on the company's shares by the end of its year of income; and
(b) the balance of its share premium account (if any) at the end of its year of income.
repayments of non-commercial loans means the total of:
(a) any repayments to the company of loans that have been taken by section 108, 109D or 109E to be dividends; and
(b) amounts set off against loans that have been taken by section 108, 109D or 109E to be dividends, other than such amounts that are set off as a result of:
(i) a dividend (being a later dividend for the purposes of section 109ZC or a subsequent dividend for the purposes of subsection 108(2)) being paid by the company to the extent that the dividend has not been franked under section 160AQF; or
(ii) a loan, or a part of a loan, being forgiven.
(3) The amount of a dividend that a private company is taken under this Division to pay is worked out using the formula:
Provisional dividend * (Distributable surplus for year of income/Total of provisional dividends)
where:
provisional dividend is the amount of the dividend that the private company would be taken to pay apart from this section.
total of provisional dividends is the sum of all the dividends the private company is taken under this Division to pay at the end of the year of income apart from this section.
Requirement for private company to provide statement
(4) If this section sets the amount of a dividend taken under this Division to be paid by a private company to an entity at the end of a year of income, the private company must give the entity a written statement as soon as possible after the end of the year of income.
What the statement must contain
(5) The statement must set out:
(a) the private company's distributable surplus for the year of income; and
(b) the total amount the company would be taken under this Division to pay as dividends in the year of income apart from this section.
109Z Characteristics of dividends taken to be paid under this Division
If a private company is taken under this Division to have paid a dividend to an entity, the dividend is taken for the purposes of this Act to be paid:
(a) to the entity as a shareholder in the private company; and
(b) out of the private company's profits.
109ZA No dividend taken to be paid for withholding tax purposes
If a private company is taken under this Division to have paid a dividend to an entity, disregard the dividend for the purposes of:
(a) Division 11A of Part III (which deals with withholding tax on dividends paid to non-residents and some other people); and
(b) Division 4 of Part VI (which deals with collection of withholding tax).
109ZB Amount treated as dividend is not a fringe benefit
(1) This Division applies to a loan of an amount to an entity by a private company, even if the loan is made:
(a) to the entity in its capacity as an employee (as defined in the Fringe Benefits Tax Assessment Act 1986) or an associate of such an employee; or
(b) in respect of the employment of an employee (as defined in that Act).
Note: This helps ensure that a loan is not a fringe benefit for the purposes of that Act.
(2) This Division applies to a private company's forgiveness of a debt owed by an entity to the private company, even if:
(a) the entity owed the debt in its capacity as an employee (as defined in the Fringe Benefits Tax Assessment Act 1986) or an associate of such an employee; or
(b) the forgiveness occurs in respect of the employment of an employee (as defined in that Act).
Note: This helps ensure that the forgiveness of a debt is not a fringe benefit for the purposes of that Act.
(3) However, this Division does not apply to a payment made to a shareholder, or an associate of a shareholder, in their capacity as an employee (as defined in the Fringe Benefits Tax Assessment Act 1986) or an associate of such an employee.
109ZC Treatment of dividend that is reduced on account of an amount taken under this Division to be a dividend
(1) This section sets out special rules for dealing with a dividend (the later dividend ) distributed by a private company if some or all of the later dividend is set off against some or all of an amount taken under this Division to be a dividend previously paid by the company.
Example: Some or all of a dividend distributed by a private company to a shareholder might be set off to reduce a loan the company had previously made to the shareholder that was treated as a dividend under Subdivision B.
(2) The amount of the later dividend set off is taken not to be a dividend for the purposes of this Act except Part IIIAA (which deals with franking of dividends). However, if the amount set off exceeds the amount of the later dividend that has not been franked under section 160AQF, the excess is still a dividend.
Note: This prevents double taxation by ensuring that the entity's assessable income does not include the amount of the later dividend that is not paid to the entity (except to the extent that that amount is franked).
(3) Subsection (2) does not cause the amount taken not to be a dividend to be exempt income for the purposes of:
(a) section 160APP (which gives companies receiving franked dividends a franking credit, except to the extent the dividends are exempt income); or
(b) section 160AQT (which includes amounts in the assessable income of entities receiving dividends that are not exempt income).
Subdivision G - Defined terms
109ZD Defined terms
In this Division:
amalgamated loan has the meaning given by subsection 109E(3).
arrangement has the meaning given by section 995-1 of the Income Tax Assessment Act 1997.
associate has the meaning given by section 318.
benchmark interest rate for a year of income has the meaning given by subsection 109N(2).
distributable surplus of a company for a year of income has the meaning given by subsection 109Y(2).
entity has the meaning given by section 960-100 of the Income Tax Assessment Act 1997.
forgive a debt has the meaning given by section 109F.
guarantee , in relation to a loan, includes providing security for the loan.
loan has the meaning given by subsection 109D(3).
PAYE earnings has the meaning given by section 995-1 of the Income Tax Assessment Act 1997.
payment has the meaning given by subsection 109C(3).
109ZE Interpretation rules about entities
The rules in section 960-100 of the Income Tax Assessment Act 1997 about entities apply to this Division.