Ask Ban Tacs Question
If a company director takes money out of his company regularly, several times a year, year in year out but repays it before the 30th of June each year, does Div7a apply?
Answer
No, in fact he has up until the due date for lodgement of the company tax return to repay the amount according to section 109D though section 109R makes it clear if it is just a temporary repayment then it is not considered a repayment so you need to look at what is really going on. A typical clearing account would be ok, money in and out cancelling each other out frequently but if it is just repaid and then same or more taken straight back out again section 109R says it isn’t counted as a repayment. Always better to have it repaid by 30th June so not in the balance sheet, no questions asked. It is a question of whether a reasonable person would consider that it has just been a temporary repayment.
The ATO use the following example:
Example 10 – amount not taken to be repayment
Alicia obtains a loan of $10,000 from Cleary Pty Ltd. Alicia has until the lodgment day to repay the loan. Two weeks before the lodgment day Alicia obtains a further $10,000 from Cleary Pty Ltd. She then repays the original $10,000 loan a week before the lodgment day.
The repayment of the original $10,000 loan is not a repayment for the purposes of sections 109D. This is because Alicia has borrowed a similar amount from Cleary Pty Ltd and in this case, a reasonable person would conclude that the loan was obtained to make the repayment of the original $10,000.
The original $10,000 loan is treated as a deemed dividend subject to the distributable surplus of the private company.
The section numbers I refer to are below and the wording is pretty clear.
SECTION 109D LOANS TREATED AS DIVIDENDS https://www.ato.gov.au/law/view/document?LocID=%22PAC%2F19360027%2F109D%22
109D(1) Loans treated as dividends in year of making.
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 before the lodgment day for 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.
From https://www.ato.gov.au/law/view/document?docid=PAC/19360027/109R
109R(1) [Some payments not considered]
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) .
109R(2) [Intention to obtain loan]
A payment must not be taken into account if:
- (a) a reasonable person would conclude (having regard to all the circumstances) that, when the payment was made, the entity intended to obtain a loan or loans from the private company of a total amount similar to, or larger than, the payment; or
- (b) both of the following subparagraphs apply:
- (i) the entity obtained, before the payment was made, a loan or loans from the private company of a total amount similar to, or larger than, the amount of the payment;
- (ii) a reasonable person would conclude (having regard to all the circumstances) that the entity obtained the loan or loans in order to make the payment.
