Under S.109C, a private company is taken to pay a dividend to a shareholder (or their associate) if the company pays the shareholder (or associate) an amount during the income year. For Division 7A purposes, a payment to a shareholder is defined under S.109C and S.109CA to mean:
- a payment to the extent that is to the shareholder (or associate), on behalf of the shareholder or for the benefit of the shareholder (associate);
- a credit of an amount to the extent that is to the shareholder (or associate), on behalf of the shareholder (or associate) or for the benefit of the shareholder (or associate);
- a transfer of property to the shareholder (or associate) (note: this includes, among other things, the right to use real property under a lease); and
- pursuant to S.109CA, a payment also includes the provision of an asset for use by the shareholder (or associate) – this provision basically extends the concept of a ‘payment’ to also include a licence, or an informal right to use an asset (i.e., to the mere use of an asset).
The dividend is equal to the ‘amount paid’, subject to the company’s distributable surplus. In the context of either the transfer or use of property, this basically means the amount that would have been paid for the transfer of the property, or its use (as appropriate) by parties dealing at arm’s length less any consideration given by the shareholder to the company.
The Commissioner’s discretion in S.109RB
The Commissioner has a discretion in S.109RB to disregard a deemed dividend, or to allow the deemed dividend to be franked if the dividend arose because of an honest mistake or inadvertent omission. Obtaining relief under S.109RB involves the following two-step process:
1) The threshold question is whether Division 7A is triggered because of either an honest mistake, or an inadvertent omission by the recipient, the private company or any other entity whose conduct contributed to that result.
The terms ‘honest mistake’ and ‘inadvertent omission’ are not defined in the legislation, and therefore, take on their ordinary meaning. The ATO’s guidance in TR 2010/8 provides that for the purposes of S.109RB, a mistake is an incorrect view, opinion or misunderstanding as to how Division 7A operates (and such a mistake must be honestly made). On the other hand, an omission is a failure to take action that is relevant to or affects the operation of Division 7A (and such an omission must be inadvertent).
2) The Commissioner must then consider the following factors to determine whether discretion should be granted and whether any conditions should be imposed:
- The circumstances that led to the mistake or omission;
- The extent to which any of the relevant entities mentioned in in Step 1 have taken action to try to correct the mistake or omission and if so, how quickly that action was taken;
- Whether Division 7A has operated previously in relation to any of the relevant entities, and if so, the circumstances in which this occurred; and
- Any other matters that the Commissioner considers relevant.
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