ATO ID 2011/8 | Income Tax: Division 7A: interest component of shortfall in minimum yearly repayment and section 109D of the ITAA 1936

Status: May be released

Issue

Where a shortfall in a minimum yearly repayment gives rise to a deemed dividend under section 109E of the Income Tax Assessment Act 1936 (ITAA 1936), can a deemed dividend also arise under section 109D of the ITAA 1936 in respect of the proportion of the shortfall comprising unpaid interest?

Decision

No. Where a shortfall in a minimum yearly repayment gives rise to a deemed dividend under section 109E of the ITAA 1936, a deemed dividend does not also arise under section 109D of the ITAA 1936 in respect of the proportion of the shortfall comprising unpaid interest.

Facts

• Private company made an unsecured loan to the sole shareholder under a complying s 109N agreement.
• No repayment was made for the 2009-10 income year.
• A deemed dividend arose under s 109E.

Reasons for Decision

The non-payment of interest under a consensual agreement may satisfy the requirements of a 'provision of credit' or 'financial accommodation' under s 109D. However, the generalia specialibus non derogant rule provides that a specific provision overrides the general. Section 109E specifically targets the shortfall in minimum yearly repayments (which includes interest), so s 109D does not apply to the same amount to avoid double taxation.

Source: ATO Legal Database