The ATO recently published a draft determination [i] that proposes to clarify:
The interposed entity rules in Division 7A are very complex. This Draft Taxation Determination allows private companies to better understand how the Commissioner determines the amount of any deemed payment or notional loan made by a private company to one of its shareholders, or to an associate of one of its shareholders, through an interposed entity. Those payments are made under section 109T of the ITAA 36.
If Division 7A of the ITAA 36 applies, then certain payments, loans and forgiven debts that a private company arranges for its shareholders or their associates are deemed to be unfranked dividends. You can read a brief outline of Div 7A here
Section 109T of the ITAA 36 deems a private company to have made a payment or loan to an entity (target entity) for Division 7A purposes if:
The diagram below shows how this arrangement works.
If the section 109T conditions are satisfied, then the Commissioner of Taxation (Commissioner) will determine the amount of the payment or loan deemed to have been made by the private company for Division 7A purposes.
On 15 December 2010, the ATO released Draft Taxation Determination 2010/D10 [ii] setting out the factors the Commissioner will consider in making this determination.
Broadly, the draft provides that in determining the amount of any deemed payment or notional loan made by a private company under section 109T, the Commissioner will take into account several factors occurring before the earlier of the following dates (lodgement date):
The factors that the Commissioner will take into account include the following:
The Draft Taxation Determination provides the following example to illustrate how the Commissioner will make his determination under section 109T:
Facts of the example
Analysis of the example
A reasonable person would conclude that Jones Pty Ltd loaned $120,000 to Jones Holding Co Pty Ltd solely or mainly as part of an arrangement involving a loan to Jack. Section 109T would therefore apply to treat Jones Pty Ltd as having made a notional loan to Jack.
In determining the amount of this notional loan, the Commissioner would take into account the fact that Jones Pty Ltd and Jones Holding Co Pty Ltd have entered into a Division 7A loan agreement. The effect of this is that the amount of the notional loan deemed to have made by Jones Pty Ltd to Jack would be reduced by $100,000. This would result in a notional loan with a value of nil.
Once the Determination is finalised, it is proposed to apply retrospectively to all arrangements entered into both before and after the date of its issue.
The ATO has invited public comments on the Draft Taxation Determination. All comments must be received by the ATO on or before 4 February 2011.
For questions or more information about the above article, please call Maddocks in Melbourne (03 9288 0555) and ask for a member of the Maddocks Tax and Revenue Team.
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[i] Draft Taxation Determination TD 2010/D10
[ii] Draft Taxation Determination TD 2010/D10
Qualifications: BA (Philosophy), Monash University, JD (Juris Doctor), University of Melbourne
Jack is a member of Maddocks Commercial team. He advises a range of corporate and private clients on:
Jack acts for clients on both buy-side and sell-side and specialises in founder-owned businesses and Australian subsidiaries of multi-national companies. He works across a number of sectors including information technology, professional services, and property development and management including land lease.
Jack’s structuring work includes assisting multinationals to structure Australian operations, listed companies to achieve regulatory compliance / optimisation and providing general tax structuring. He has also represented clients in tax controversies including before the General Anti-Avoidance Review Panel (GAAR Panel) and the Federal Court of Australia.
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