(a) the circumstances in which the relevant holding company or holding companies acquired a direct or indirect beneficial interest or interests in shares in the company concerned (whether the interest was, or the interests were, acquired before or during the year of income) and, in particular, whether those circumstances were capable of explanation by reference to ordinary commercial dealing;
(b) the provisions of the constituent document of the company concerned as in force during the year of income that related to the management or conduct of the affairs of that company, including the provisions of the constituent document that related to the appointment or removal of directors, the issue, allotment or redemption of shares, the grant, withdrawal or variation of rights in respect of shares, the payment of dividends and the investment or other application of moneys of that company;
(c) the nature and extent of any right, power, option or agreement in existence during the year of income that related to the management or conduct of the affairs of the company concerned, including any right, power, option or agreement that related to the appointment or removal of directors, the issue, allotment or redemption of shares, the grant, withdrawal or variation of rights in respect of shares, the payment of dividends and the investment or other application of moneys of that company;
(d) whether rights of the relevant holding company or holding companies in connexion with the company concerned were exercised during the year of income otherwise than for the benefit of the relevant holding company or holding companies or were not exercised in circumstances where it might reasonably have been expected that they would have been exercised;
(e) the nature and source of the income derived by the company concerned during the year of income and whether the derivation by that company of that income was capable of explanation by reference to ordinary commercial dealing;
(f) the manner in which the moneys of the company concerned were applied during the year of income and, in particular, whether they were lent to, or invested or otherwise made available for the use or benefit of, a person or persons other than the relevant holding company or holding companies and, if any such moneys were so lent, invested or made available:
(i) the terms and conditions upon which the moneys were so lent, invested or made available;
(ii) whether the lending, investment or making available of those moneys was capable of explanation by reference to ordinary commercial dealing; and
(iii) the connexion (if any) between that person or those persons, the directors of the company concerned and the directors of, or the beneficial owners of the shares in, the company from which the company concerned received dividends before or during the year of income;
(g) the respective amounts of any dividends in respect of shares in the company concerned that were paid during the year of income or might reasonably be expected to be paid after that year by that company and the circumstances in which those dividends were, or might be expected to be, paid; and
(h) any other relevant matters.
(5) Where a company would not, under the preceding provisions of this section, be a public company for the purposes of subsection (1) in relation to the year of income but the Commissioner is of the opinion that, having regard to:
(a) the number of persons who were, at any time during the year of income, capable of controlling the company and whether any of those persons was a public company;
(b) the market value of the shares issued by the company before the end of the year of income;
(c) the number of persons who beneficially owned shares in the company at the end of the year of income; and
(d) any other matters that the Commissioner thinks relevant;
it is reasonable that the company should be treated as a public company for the purposes of subsection (1) in relation to the year of income, the company shall be deemed to be a public company for those purposes in relation to the year of income.
(5A) The Commissioner may, under subsection (5), form an opinion that it is reasonable that a company should be treated as a public company for the purposes of subsection (1) in relation to a year of income notwithstanding that the forming of such an opinion by the Commissioner would impose on the company a liability to pay a greater amount of income tax than the company would otherwise be liable to pay.
(6) Notwithstanding anything in the preceding provisions of this section, the Commissioner may treat a company as not being, by virtue of paragraph (2)(a) or (b), a public company for the purposes of subsection (1) in relation to the year of income if the Commissioner is of the opinion that, by reason of:
(a) any provisions in the company’s constituent document, or in any contract, agreement or instrument, authorizing the variation or abrogation of the voting rights or rights to dividends in respect of any shares in the company or relating to the conversion, exchange or redemption of any such shares;
(b) any contract, agreement, option or instrument under which a person has power to acquire shares in the company; or
(c) any power or authority in a person in relation to the voting rights or rights to dividends in respect of any shares in the company;
the voting rights or rights to dividends in respect of any shares in the company were, at any time during the year of income, capable of being varied or abrogated in such a manner (notwithstanding that they were not in fact varied or abrogated in that manner) that:
(d) not less than three‑quarters of the voting power in the company would have been capable of being exercised by one person or by persons not more than 20 in number;
(e) not less than three‑quarters of:
(i) the amount of any dividend paid by the company during the year of income; or
(ii) if more than one dividend was paid by the company during the year of income—the total amount of all the dividends paid by the company during the year of income;
would have been paid to one person or to persons not more than 20 in number; or
(f) in the case where the company did not pay a dividend during the year of income—if a dividend had been paid by the company at any time during the year of income, not less than three‑quarters of the amount of that dividend would have been paid to one person or to persons not more than 20 in number.
(7) For the purposes of this section:
(a) a person, whether or not he or she holds shares in the company concerned;
(b) his or her relatives; and
(c) in relation to any shares in respect of which they are such nominees, his or her nominees and the nominees of any of his or her relatives;
shall be deemed to be one person.
109 Excessive payments to shareholders, directors and associates deemed to be dividends
(1) If a private company pays or credits to an associated person an amount (in this subsection called the excessive amount) that is, or purports to be:
(a) remuneration for services rendered by the associated person; or
(b) an allowance, gratuity or compensation in consequence of the retirement of the associated person from an office or employment held by the associated person in the company, or upon the termination of any such office or employment;
so much (if any) of the excessive amount as exceeds an amount that, in the opinion of the Commissioner, is reasonable:
(c) is not an allowable deduction; and
(d) shall, for the purposes of this Act other than Division 11A of Part III, be deemed to be a dividend paid by the company:
(i) to the associated person as a shareholder in the company;
(ii) out of profits derived by the company; and
(iii) on the last day of the year of income of the company in which the excessive payment or credit is made.
Note: This section does not apply to an amount if the amount is paid to a CGT concession stakeholder under subsection 152‑325(1) of the Income Tax Assessment Act 1997 (see subsection 152‑325(11)).
(2) For the purposes of this section:
(a) a transfer of property shall be deemed to be the payment of an amount equal to the value of the property; and
(b) a reference to an associated person, in relation to a company, is a reference to:
(i) a person who is, or has been, a shareholder in, or director of, the company; or
(ii) a person who is an associate, within the meaning of section 318, of a person who is, or has been, a shareholder in, or director of, the company.
Division 7A—Distributions to entities connected with a private company
Subdivision A—Overview of this Division
109B Simplified outline of this Division
The following is a simplified outline of this Division:
This Division treats 3 kinds of amounts as dividends paid by a private company:
• amounts paid by the company to a shareholder or shareholder’s associate (see section 109C);
• amounts lent by the company to a shareholder or shareholder’s associate (see sections 109D and 109E);
• amounts of debts owed by a shareholder or shareholder’s associate to the company that the company forgives (see section 109F).
This treatment makes the amounts assessable income of the shareholder or associate (under section 44).
However, some payments, loans and forgiven debts are not treated as dividends. (See Subdivisions C and D.) Also, this Division does not apply to demerger dividends. (See Subdivision DA.)
An amount may be treated as a dividend even if it is paid or lent by the company to the shareholder or associate through one or more interposed entities. (See Subdivision E.)
An amount may also be included in the assessable income of a shareholder or shareholder’s associate if:
(a) a company has an unpaid present entitlement to income of a trust; and
(b) the trustee makes a payment or loan to, or forgives a debt of, the shareholder or associate.
(See Subdivisions EA and EB.)
If the total of the amounts is more than the company’s distributable surplus, only the part of the total equal to the distributable surplus is treated as dividends. (See section 109Y.)
This Division applies to non‑share equity interests and non‑share dividends in the same way it applies to shares and dividends.
Subdivision AA—Application of Division
109BA Application of Division to non‑share dividends
This Division:
(a) applies to a non‑share equity interest in the same way as it applies to a share; and
(b) applies to an equity holder in the same way as it applies to a shareholder; and
(c) applies to a non‑share dividend in the same way as it applies to a dividend.
109BB Application of Division to closely‑held corporate limited partnerships
This Division applies to a corporate limited partnership in relation to a year of income in the same way as it applies to a private company in relation to a year of income, if, any time during the year of income:
(a) the partnership has fewer than 50 members; or
(b) any entity has, directly or indirectly, and for the entity’s own benefit, an entitlement to a 75% or greater share of the income or capital of the partnership.
Example: Michael has an entitlement to an 80% share of the income of 2 fixed trusts. The 2 fixed trusts have, between them, an entitlement to 100% of the income of a corporate limited partnership. For the purposes of paragraph (b), Michael has, indirectly, and for his own benefit, an entitlement to a 75% or greater share of the income of the partnership.
109BC Application of Division to non‑resident companies
(1) This Division applies, in relation to a payment, loan or debt forgiveness, in relation to a private company that is a non‑resident as if:
(a) references in this Division to a year of income of the company were references to a tax accounting period in relation to the company in relation to a foreign tax imposed by a tax law of:
(i) if the company is a resident of only one foreign country—that foreign country; or
(ii) otherwise—the foreign country to which subsection (2) applies; and
(b) references in this Division to the lodgment day for the year of income were references to the due date for lodgment of the company’s return of income for the tax accounting period under that tax law.
(2) For the purposes of subparagraph (1)(a)(ii), this subsection applies to a foreign country (the relevant country) if:
(a) the company is a resident of the relevant country; and
(b) of all the tax accounting periods:
(i) in relation to the company in relation to the foreign taxes imposed by the tax laws of the foreign countries of which the company is resident; and
(ii) during which the payment, loan or debt forgiveness is made;
the tax accounting period under the tax law of the relevant country ends first; and
(c) if more than one of the tax accounting periods mentioned in paragraph (b) end first—the due date for lodgment of the company’s return of income for the tax accounting period under the tax law of the relevant country is not later than the due date for lodgment for any of the other tax accounting periods that end first.
(3) In this section:
tax accounting period has the meaning given by section 317.
tax law has the meaning given by section 317.
Note: Section 109L prevents amounts from being included in assessable income under this Division if the amounts are included in, or excluded from, assessable income under another provision of this Act, such as the rules relating to CFCs and FIFs.
Subdivision B—Private company payments, loans and debt forgiveness are treated as dividends
109C Payments treated as dividends
When private company is taken to pay a dividend
(1) A private company is taken to pay a dividend to an entity at the end of the private company’s year of income if the private company pays an amount to the entity during the year and either:
(a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or
(b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.
Note 1: Some payments do not give rise to dividends under Subdivision D. This section also does not give rise to a dividend if the amount is paid to a CGT concession stakeholder under subsection 152‑325(1) of the Income Tax Assessment Act 1997 (see subsection 152‑325(11)).
Note 2: A private company is treated as making a payment to a shareholder or shareholder’s associate if an interposed entity makes a payment to the shareholder or associate. See Subdivision E.
Amount of dividend
(2) The dividend is taken to equal the amount paid, subject to section 109Y.
Note: Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company’s distributable surplus.
What is a payment to an entity?
(3) In this Division, payment to an entity means:
(a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and
(b) a credit of an amount to the extent that it is:
(i) to the entity; or
(ii) on behalf of the entity; or
(iii) for the benefit of the entity; and
(c) a transfer of property to the entity.
Note: See also section 109CA (Payment includes provision of asset).
Loans are not payments
(3A) However, a loan to an entity is not a payment to the entity.
Note: Payments converted to loans before the private company’s lodgment day are treated as loans (see subsection 109D(4A)).
Value of payment by transfer of property
(4) The amount of a payment consisting of a transfer of property is the amount that would have been paid for the transfer by parties dealing at arm’s length less any consideration given by the transferee for the transfer. (The amount of a payment is nil if the consideration given by the transferee equals or exceeds the amount that would have been paid at arm’s length for the transfer.)
109CA Payment includes provision of asset
(1) In this Division, payment to an entity includes the provision of an asset for use by the entity.
Note: This includes provision under a lease or licence.
Example: Yacht builder Mainbrace Enterprises Pty Ltd owns a yacht for the purpose of sales demonstrations. With the private company’s permission, one of its shareholders uses the yacht on weekends. The company has made a payment to the shareholder, unless one of the exceptions to subsection (1) applies.
(2) The time the payment is made is the time the entity first:
(a) uses the asset with the permission of the provider of the asset; or
(b) has a right to use the asset (whether alone or together with other entities), at a time when the provider of the asset does not have a right:
(i) to use the asset; or
(ii) to provide the asset for use by another entity.
Example: Paragraph (a) could apply if a shareholder were driving a company car with the company’s permission. Paragraph (b) could apply if the shareholder had the car parked at his or her house or at another place of his or her choosing.
(3) However, if the use or right continues into another income year of the entity, treat the provision of the asset for use in the other income year as being a separate payment made at the start of that year.
Exceptions
(4) Subsection (1) does not apply if the provision of the asset would, if done in respect of the employment of an employee, be a minor benefit under section 58P of the Fringe Benefits Tax Assessment Act 1986.
(5) Subsection (1) does not apply to the extent that, if the entity had incurred and paid expenditure in respect of the provision of the asset, a once‑only deduction would have been allowable to the entity in respect of the expenditure, ignoring Divisions 28 (Car expenses) and 900 (Substantiation rules) of the Income Tax Assessment Act 1997.
(6) Subsection (1) does not apply to the provision of a dwelling, if: