Example: Subsection (3) of this section provides that a debt is forgiven if it has not been paid by the time a statute of limitations prevents recovery of the debt. (It does this by applying paragraph 245‑35(b) of the Income Tax Assessment Act 1997.) The debt might already have been forgiven under subsection (6) of this section (because a reasonable person would have concluded earlier that the private company was not going to insist on payment). This section would apply to the forgiveness under subsection (6) but not the forgiveness under subsection (3).
Subdivision C—Forgiven debts that are not treated as dividends
109G Debt forgiveness that does not give rise to a dividend
Forgiveness of debt owed by company generally not treated as dividend
(1) A private company is not taken under this Division to pay a dividend because a debt owed to it by another company is forgiven.
Note: This does not apply to a debt owed by a company as trustee. (See section 109ZE.)
Forgiveness of debts under Bankruptcy Act not treated as dividends
(2) A private company is not taken under this Division to pay a dividend because a debt is forgiven because the debtor becomes a bankrupt or because of Part X of the Bankruptcy Act 1966.
Forgiveness of loan debt does not give rise to dividend if loan gives rise to dividend under section 109D
(3) A private company is not taken under section 109F to pay a dividend at the end of a year of income because of the forgiveness of an amount of a debt resulting from a loan if, because of the loan, the private company is taken:
(a) under section 109D to pay a dividend at the end of that year or an earlier one; or
(b) under former subsection 108(1) to pay a dividend on the last day of that year or an earlier one.
Reduced dividend for forgiveness of loan debt if loan causes dividend under section 109E
(3A) Subsection (3B) applies if:
(a) a private company is taken under section 109F to pay a dividend at the end of a year of income because of the forgiveness of an amount of a debt resulting from a loan; and
(b) the private company is taken under section 109E to pay a dividend at the end of an earlier year of income in relation to the loan.
(3B) The amount of the dividend mentioned in paragraph (3A)(a) is reduced by the amount of the dividend mentioned in paragraph (3A)(b) (but not below zero).
Note: There may be more than one reduction under this subsection if the private company has been taken under section 109E to pay more than one dividend in relation to the loan.
Commissioner may treat forgiveness as not giving rise to dividend
(4) A private company is not taken under this Division to pay a dividend because of the forgiveness of a debt owed by an entity if the Commissioner is satisfied that:
(a) the debt was forgiven because payment of the debt would have caused the entity undue hardship; and
(b) when the entity incurred the debt, the entity had the capacity to pay the debt; and
(c) the entity lost the ability to pay the debt in the foreseeable future as a result of circumstances beyond the entity’s control.
Subdivision D—Payments and loans that are not treated as dividends
109H Simplified outline of this Subdivision
The following is a simplified outline of this Subdivision:
This Subdivision sets out rules about payments and loans that are not treated as dividends.
The following sorts of payments are not treated as dividends:
• payments of genuine debts (section 109J);
• payments to other companies (section 109K);
• payments that are otherwise assessable or that are specifically excluded from assessable income (section 109L).
The following sorts of loans are not treated as dividends:
• loans to other companies (section 109K);
• loans that are otherwise assessable (section 109L);
• loans made in the ordinary course of business on ordinary commercial terms (section 109M);
• loans that meet criteria for minimum interest rate and maximum term (section 109N);
• certain loans and distributions by liquidators (section 109NA);
• loans that are for the purpose of funding the purchase of certain ESS interests under an employee share scheme (section 109NB).
An amalgamated loan may not be treated as a dividend if the Commissioner is satisfied that doing so would cause undue hardship. (See section 109Q.)
This Subdivision also provides for some loan repayments and interest payments to private companies to be disregarded if they are made with the intention of borrowing a similar amount from a private company later. (See section 109R.)
109J Payments discharging pecuniary obligations not treated as dividends
A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment:
(a) discharges an obligation of the private company to pay money to the entity; and
(b) is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm’s length.
109K Inter‑company payments and loans not treated as dividends
A private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan the private company makes to another company.
Note: This does not apply to a payment or loan to a company in its capacity as trustee. (See section 109ZE.)
109L Certain payments and loans not treated as dividends
(1) A private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan the private company makes to an entity, to the extent that the payment or loan would be included in the entity’s assessable income apart from this Division (as it operates in conjunction with section 44).
(2) In addition, a private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan that the private company made to an entity to the extent that a provision of this Act (other than this Division) has the effect that the payment or loan is not included in the entity’s assessable income even though it would otherwise be included.
109M Loans made in the ordinary course of business on arm’s length terms not treated as dividends
A private company is not taken under section 109D to pay a dividend because of a loan made:
(a) in the ordinary course of the private company’s business; and
(b) on the usual terms on which the private company makes similar loans to parties at arm’s length.
109N Loans meeting criteria for minimum interest rate and maximum term not treated as dividends
Criteria
(1) A private company that makes a loan to an entity in one of the private company’s years of income is not taken under section 109D to pay a dividend at the end of the year of income because of the loan if, before the lodgment day for the year of income:
(a) the agreement that the loan was made under is in writing; and
(b) the rate of interest payable on the loan for years of income after the year in which the loan is made equals or exceeds the benchmark interest rate for the year; and
(c) the term of the loan does not exceed the term (the maximum term) for that kind of loan worked out under subsection (3).
Benchmark interest rate
(2) The benchmark interest rate for the year of income is the Indicator Lending Rates—Bank variable housing loans interest rate last published by the Reserve Bank of Australia before the start of the year of income. However, the benchmark interest rate is the rate worked out under the regulations, if they provide for working it out.
Maximum term
(3) The maximum term is:
(a) 25 years for a loan if:
(i) 100% of the value of the loan is secured by a mortgage over real property that has been registered in accordance with a law of a State or Territory; and
(ii) when the loan is first made, the market value of that real property (less the amounts of any other liabilities secured over that property in priority to the loan) is at least 110% of the amount of the loan; and
(b) 7 years for any other loan.
However, the maximum term for a loan is the period worked out under the regulations, if they provide for working out the maximum term for that kind of loan.
(3A) Reduce the maximum term under paragraph (3)(a) for a loan (the new loan) in accordance with subsection (3B) if:
(a) the new loan results from the refinancing of another loan (the old loan); and
(b) the maximum term of the old loan under subsection (3) was 7 years; and
(c) the maximum term of the new loan under subsection (3) is 25 years (disregarding this subsection).
(3B) The amount of the reduction is equal to the length of the period:
(a) starting when the old loan was made; and
(b) ending when the old loan was refinanced.
(3C) Reduce the maximum term under paragraph (3)(b) for a loan (the new loan) in accordance with subsection (3D) if:
(a) the new loan results from the refinancing of another loan (the old loan); and
(b) the maximum term of the old loan under subsection (3) was 25 years; and
(c) the maximum term of the new loan under subsection (3) is 7 years (disregarding this subsection); and
(d) the length of the period:
(i) starting when the old loan was made; and
(ii) ending when the old loan was refinanced;
exceeds 18 years.
(3D) The amount of the reduction is the excess mentioned in paragraph (3C)(d).
Regulations may adopt rate as published from time to time
(4) Regulations made for the purposes of subsection (2) may apply, adopt or incorporate a rate published in an instrument after they are made or take effect, or a rate contained in an instrument from time to time despite any other Act.
109NA Certain liquidator’s distributions and loans not treated as dividends
A private company is not taken under section 109C or subsection 109D(1) to pay a dividend because of a distribution or loan made in the course of the winding‑up of the company by a liquidator.
Note: However, if such a loan is not fully repaid by the end of the following year of income, the company will be taken to have paid a dividend under subsection 109D(1A).
109NB Loans to purchase shares under employee share schemes not treated as dividends
A private company is not taken under section 109D to pay a dividend because of a loan made solely for the purpose of enabling the shareholder, or an associate of the shareholder, to acquire an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which:
(a) Subdivision 83A‑B, and the provisions referred to in paragraphs 83A‑33(1)(a) to (c), of that Act apply; or
(aa) Subdivision 83A‑B, and the provisions referred to in paragraphs 83A‑35(1)(a) and (b), of that Act apply; or
(b) Subdivision 83A‑C of that Act applies.
109P Amalgamated loans not treated as dividends in the year they are made
A private company is not taken under section 109D to pay a dividend because of an amalgamated loan it makes.
Note: A shortfall in a minimum yearly repayment of an amalgamated loan may be treated as a dividend under section 109E.
109Q Commissioner may allow amalgamated loan not to be treated as dividend
(1) A private company is not taken under section 109E to pay a dividend at the end of one of its years of income (the current year) because of an amalgamated loan to an entity if:
(a) the amount paid to the private company by the entity in the current year in relation to the loan is less than the minimum yearly repayment of the loan for the current year worked out under subsection 109E(5); and
(b) the entity satisfies the Commissioner that:
(i) that amount was less than the minimum yearly repayment because of circumstances beyond the entity’s control; and
(ii) the entity would suffer undue hardship if the private company were taken under section 109E to pay a dividend to the entity at the end of the current year because of the loan.
(2) In deciding whether he or she is satisfied, the Commissioner must consider:
(a) the entity’s capacity, at the end of the year of income in which the amalgamated loan was made, to repay the loan; and
(b) any circumstances that have reduced the entity’s capacity to repay the loan; and
(c) whether the entity took all reasonable steps to make payments relating to the amalgamated loan during the current year equal to the minimum yearly repayment of the loan for the current year; and
(d) whether the entity has made payments relating to the loan as soon as possible after the current year equalling the difference between:
(i) the minimum yearly repayment for the current year; and
(ii) the amount of payments made during the current year relating to the loan.
109R Some payments relating to loans not taken into account
(1) 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).
(2) 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.
(3) Subsection (2) does not apply to a payment made by setting off against an amount payable in relation to the loan:
(a) a dividend payable by the private company to the entity; or
(b) work and income support related withholding payments and benefits payable by the private company to the entity; or
(ba) payments covered by section 12‑55 in Schedule 1 to the Taxation Administration Act 1953; or
(c) if the entity has transferred property to the private company—an amount equalling the difference between:
(i) the amount that a party at arm’s length from the entity would have paid for the transfer of the property to the party; and
(ii) the amount that the private company has already paid the entity (by way of set‑off or otherwise) for the transfer.
(4) Nor does subsection (2) apply to a payment made on behalf of the entity (the borrower) by another entity paying to the private company an amount that:
(a) is payable by the other entity to the borrower; and
(b) is assessable income of the borrower for the year of income in which the payment was made or an earlier year of income.
(5) Subsection (2) does not apply to a payment if:
(a) the payment is made to refinance the loan mentioned in subsection (1) (the old loan); and
(b) the entity to which the old loan was made has another loan (the primary loan) from another entity; and
(c) the old loan becomes subordinated to the primary loan; and
(d) the refinancing of the old loan mentioned in paragraph (a) took place in connection with that subordination; and
(e) that subordination arose as a result of circumstances beyond the control of the entity to which the old loan was made; and
(f) the entity to which the old loan was made and the other entity dealt with each other at arm’s length in relation to that subordination; and
(g) the private company and the other entity dealt with each other at arm’s length in relation to that subordination.
(6) Subsection (2) does not apply to a payment if:
(a) the payment is made to refinance the loan mentioned in subsection (1) (the old loan); and
(b) the refinancing results in another loan (the new loan); and
(c) the maximum term of the old loan under subsection 109N(3) was 7 years; and
(d) the maximum term of the new loan under subsection 109N(3) is 25 years (reduced in accordance with subsection 109N(3B)).
(7) Subsection (2) does not apply to a payment if:
(a) the payment is made to refinance the loan mentioned in subsection (1) (the old loan); and
(b) the refinancing results in another loan (the new loan); and
(c) the maximum term of the old loan under subsection 109N(3) was 25 years; and
(d) the maximum term of the new loan under subsection 109N(3) is:
(i) unless subparagraph (ii) applies—7 years; or
(ii) if subsection 109N(3D) applies—7 years reduced in accordance with that subsection.
Subdivision DA—Demerger dividends not treated as dividends
109RA Demerger dividends not treated as dividends
This Division does not apply to a demerger dividend to which section 45B does not apply.
Subdivision DB—Other exceptions
109RB Commissioner may disregard operation of Division or allow dividend to be franked
(1) The Commissioner may make a decision under subsection (2) if:
(a) this Division (disregarding this section) operates with the result that:
(i) a private company is taken to pay a particular dividend to a particular entity (the recipient) under this Division; or
(ii) a particular amount is included, as if it were a dividend, in the assessable income of a particular entity (also the recipient) in relation to a private company under Subdivision EA; and
(b) the result mentioned in paragraph (a) arises because of an honest mistake or inadvertent omission by any of the following entities:
(i) the recipient;
(ii) the private company;
(iii) any other entity whose conduct contributed to that result.
(2) The Commissioner may decide in writing that:
(a) the result mentioned in paragraph (1)(a) should be disregarded (see subsection (4)); or
(b) the dividend mentioned in subparagraph (1)(a)(i) may be franked in accordance with Part 3‑6 of the Income Tax Assessment Act 1997 (see subsection (6)).