ATO Interpretative Decision
ATO ID 2004/967
Income Tax
Interaction between Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) and Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997)FOI status: may be released
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This ATOID provides you with the following level of protection:
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is a loan, that is a deemed dividend under section 109D of the Income Tax Assessment Act 1936 (ITAA 1936), included in the assessable income of the taxpayer under section 44 of the ITAA 1936 where:
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- the loan is made from private company profits that represent personal services income of the taxpayer; and
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- that personal services income has been included in the taxpayer's assessable income under subsection 86-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Where income is derived by a private company that is personal services income of the taxpayer within the meaning of subsection 84-5(1) of the ITAA 1997 and is included in the taxpayer's assessable income under subsection 86-15(1) of the ITAA 1997, a loan made by the private company to the taxpayer out of profits from that income and treated as a dividend under section 109D of Division 7A of the ITAA 1936, will not be included in the taxpayer's assessable income under section 44 of the ITAA 1936.
Facts
The taxpayer is a shareholder of a private company. The private company is a personal services entity and its ordinary income is the personal services income of the taxpayer.
In the income year, the private company derived ordinary income of $125,000 from the personal efforts or skills of the taxpayer and incurred expenses of $25,000. These expenses are allowable deductions and relate to the taxpayer's personal services income.
The private company is not conducting a personal services business within the meaning of Division 87 of the ITAA 1997 and an amount of $100,000 was included in the taxpayer's assessable income in that year.
In the following income year, the private company made a loan of $100,000 to the taxpayer which represented the personal services income included in the taxpayer's assessable income in the prior year. The loan was not an excluded loan and was not repaid by the end of the income year in which it was made.
As at 30 June in the income year the loan was made, the private company had a distributable surplus of $100,000 for the purposes of section 109Y of the ITAA 1936.
Reasons for Decision
As the private company is a personal services entity within the meaning of subsection 86-15(2) of the ITAA 1997, and is not conducting a personal services business within the meaning of Division 87 of the ITAA 1997, $100,000 is included in the assessable income of the taxpayer for the income year under subsection 86-15(1) of the ITAA 1997.
Subsection 109D(1) of the ITAA 1936 provides that a private company is taken to pay a dividend to a shareholder or their associate at the end of the private company's year of income if the private company makes a loan to the shareholder or their associate during the year which is not fully repaid before the lodgement day for the current year and Subdivision D of Division 7A of the ITAA 1936 does not apply. The amount of the dividend is the lesser of the amount of the loan that has not been repaid and the private company's distributable surplus (subsection 109D(1AA) and section 109Y of the ITAA 1936).
As the loan to the taxpayer is not an excluded loan under Subdivision D of Division 7A of the ITAA 1936, and has not been repaid by the end of the income year in which it was made, the taxpayer is taken to receive a dividend of $100,000 under section 109D of the ITAA 1936 for that income year.
Under section 109Z of the ITAA 1936, the dividend is taken to have the necessary characteristics to be included in the assessable income of the taxpayer under section 44 of the ITAA 1936. These characteristics are that the dividend is taken to be paid:
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- by the private company to the taxpayer as a shareholder in the private company; and
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- out of the private company's profits.
However section 86-35 of the ITAA 1997 will apply to exclude the dividend from the assessable income of the taxpayer. Section 86-35 of the ITAA 1997 treats any later payments of personal services income that have been included in the assessable income of the taxpayer under subsection 86-15(1) of the ITAA 1997 as being neither assessable nor exempt income of the taxpayer.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 22 March 2017 | Reasons for decision | Update wording to reflect changes to legislation in subsection 109D(1) of the ITAA 1936 |
| Reasons for decision | Include reference to subsection 109D(1AA) of the ITAA 1936 | |
| Legislative references | Remove reference to subsection 6(1) of the ITAA 1936 | |
| Legislative references | Include reference to subsection 109D(1) of the ITAA 1936 | |
| Legislative references | Include reference to subsection 109D(1AA) of the ITAA 1936 | |
| Legislative references | Remove reference to section 8-1 of the ITAA 1997 | |
| Legislative references | Remove reference to section 82-20 of the ITAA 1997 |
Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1936
section 44
subsection 44(1)
Division 7A
subdivision D of Division 7A
section 109D
subsection 109D(1)
subsection 109D(1AA)
section 109Y
section 109Z
subsection 84-5(1)
subsection 86-15(1)
subsection 86-15(2)
section 86-35
subsection 86-35(1)
Related Public Rulings (including Determinations)
Taxation Ruling TR 2003/6
Keywords
Shareholder loans
Deemed dividends
Private companies
Personal Services Income
Date reviewed: 20 February 2017
ISSN: 1445-2782
| Date: | Version: | |
| 15 November 2004 | Original statement | |
| You are here | 22 March 2017 | Updated statement |