ATO Interpretative Decision
ATO ID 2003/588
Income Tax
Division 7A - loan in the ordinary course of business from a private company to an associated partnership treated as dividendsFOI status: may be released
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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does section 109M of the Income Tax Assessment Act 1936 (ITAA 1936) apply in respect of a loan made by a private company to an associated partnership where no similar loans are made to parties at arm's length?
Decision
No. Section 109M of the ITAA 1936 will not apply in respect of the loan made by the private company to the associated partnership where no similar loans are made to parties at arm's length. As no loans have been made by the private company to other parties at arm's length, the requirements of paragraph 109M(b) of the ITAA 1936 have not been satisfied.
Facts
The shareholders and directors of the private company are also the partners in a partnership.
The private company and the partnership had a loan agreement and entered into a new loan agreement on similar terms.
In previous years, the private company has made advances and loans to the partnership. The private company does not carry on any other business activity.
The private company has not made any similar loans to arm's length parties or entities.
Reasons for Decision
The making of a loan by a private company to a shareholder or an associate of the shareholder is treated as the payment of a dividend in the circumstances outlined in section 109D of the ITAA 1936. However, section 109M of the ITAA 1936 provides that such a loan is not taken to be the payment of a dividend for the purposes of section 109D if the loan meets the two requirements set out in section 109M. Both these requirements need to be satisfied for section 109M to have application.
The two requirements of section 109M are discussed below:
(a) Ordinary course of the private company's business
Paragraph 109M(a) of the ITAA 1936 requires a loan to have been made in the ordinary course of the private company's business and not in the ordinary course of business in general. As the private company is carrying on a business of making advances to the partnership, the loan will have been made in the ordinary course of the private company's business and therefore meets the requirement in paragraph 109M(a).
(b) Usual terms on which the private company makes similar loans to parties at arm's length
Paragraph 109M(b) of the ITAA 1936 requires consideration of whether there are, or have been, similar loans made to parties at arm's length. If so, a comparison of the terms of loans made to parties at arm's length is required to determine if the loans are similar.
Parties will be at arm's length if neither party is able to exercise any control or influence over the other (Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287). The private company and the partnership are associated parties (that is, not at arm's length) under section 318 of the ITAA 1936.
Section 109M of the ITAA 1936 only applies in circumstances where there are loans made by a private company to parties at arm's length. If loans are only made to parties not at arm's length (even though such loans may be made on arm's length terms), paragraph 109M(b) is not satisfied. Instances where multiple loans by a private company are provided within a group to a number of entities would also fail to satisfy paragraph 109M(b), as such loans would not be made at arm's length.
The private company has only ever made loans to the associated partnership. The private company has not provided loans to any other entity or party.
As the private company and the partnership are associated entities and there are no similar loans made to parties at arm's length, the requirements of paragraph 109M(b) have not been satisfied.
As only one paragraph of section 109M of the ITAA 1936 has been satisfied, section 109M will not apply to the loan made by the private company to the associated partnership. Consequently, section 109D of the ITAA 1936 will apply to the proposed loan.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 5 July 2016 | Reasons for Decision | Additional words included to cover the applicability of paragraph 109M(b) of the ITAA 1936 in instances where multiple loans are provided within a group to a number of entities. |
| 17 June 2016 | Reasons for Decision | Inserted case reference:
Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287 |
Year of income: Year ending 30 June 2003 Year ending 30 June 2004 Year ending 30 June 2005 Year ending 30 June 2006
Legislative References:
Income Tax Assessment Act 1936
section 109D
section 109M
section 318
paragraph 109M(b)
paragraph 109M(a)
Case References:
Australian Trade Commission v WA Meat Exports Pty Ltd
(1987) 75 ALR 287
Keywords
Private company distributions
Deemed dividends
Associated persons
Shareholder loans
Associate entity
ISSN: 1445-2782
| Date: | Version: | |
| 23 January 2003 | Original statement | |
| 17 June 2016 | Updated statement | |
| You are here | 5 July 2016 | Updated statement |