On 18 July 2018, the ATO released Tax Determination TD 2018/13 (Tax Determination), which outlines the Commissioner’s position regarding the question of whether, in the context of the interposed entity rules, section 109T of the Income Tax Assessment Act 1936 (Cth) (ITAA 36) applies to payments or loans made by a private company as part of an ordinary commercial transaction.
In short, the Commissioner’s view is that section 109T applies even where a transaction is on commercial terms where a reasonable person would conclude, with regard to the particular circumstances, that the payment or loan is made solely or mainly for the purposes of on-lending that money to a shareholder or their associate in circumstances where Division 7A would apply.
Division 7A of the ITAA 36 codifies an integrity measure designed to ensure that private companies cannot make disguised or informal distributions of profits to a shareholder, or their associate, in the form of payments, loans or forgiven debts. Generally, unless one of the exceptions in Division 7A applies, where a private company makes such a payment and the money is not repaid by the company’s lodgement date, the company is deemed under Division 7A to have paid a dividend.
Section 109T of the ITAA 36 operates to extend the scope of Division 7A to include payments of the kind described above which are made via one or more interposed entities, where the target entity is a shareholder or their associate.
The Tax Determination confirms that section 109T will apply to transactions involving interposed entities notwithstanding that they are made on commercial terms.
The Tax Determination also contains a range of practical examples of situations that would trigger the application of section 109T. Taxpayers should be mindful of the interposed entity rules to ensure they do not unwittingly issue a dividend to a shareholder or their associate which would be assessable to the recipient.