New versus old ruling
TD 2012/10 brings the ATO’s views in line with those of the H Case. As a result of the application of this ruling, the value of the present legal obligation for the private company year end reporting with respect to income tax will include:
- amount of any PAYG instalments that remain unpaid by the private company at year end (no change from TD 2008/28)
- income tax amounts payable at year end where the private company is a full self-assessment taxpayer. This is notwithstanding that the amount of tax payable is not actually due until the income tax return is lodged in the following year.
This creates a potential advantage over the previous application of TD 2008/28 for a shareholder or their associate of the private company which falls within the application of Division 7A within an income year.
Example to illustrate
During the 2010/11 financial year, private company Shareholders-R-Us Pty Ltd issued a loan of $30,000 to one of its shareholders. This loan remained unpaid at the end of the financial year and did not meet the requirements of section 109M of ITAA 1936 as it was not issued in the ordinary course of business at arm’s length.
As the loan did not meet these requirements, it fell under the application of Division 7A. At year end, the company had correctly self-assessed taxable income of $80,000, which resulted in tax liability of $24,000.
Calculation under the repealed TD 2008/28
For the purposes of determining the total present legal obligations at year end for Shareholders-R-Us Pty Ltd, TD 2008/28 states that “under an assessment system of taxation, there is no imposition of tax in a definite sum payable as a debt due to the Commonwealth in the absence of an assessment notice which has been served upon the taxpayer”. That is, the income tax payable of $24,000 is not a present legal obligation until the following year when a notice of assessment is issued.
The $24,000 of income tax is not taken into consideration for the purposes of distributable surplus calculation.
Calculation under the newly issued TD 2012/10
In determining the total present legal obligation at year end, the changes under TD 2012/10 have resulted in including income tax due and payable for an income year, regardless of the fact that the amount will not be paid until the following year.
Including income tax payable at year end as part of present legal obligation results in a lower net asset value and, ultimately, a lower distributable surplus value (all else remaining the same). This means that the distributable surplus calculation will be reduced by $24,000, as any deemed dividend is limited to the private company’s distributable surplus.
Extending the example
In the earlier example, assume the distributable surplus was calculated as $50,000 for the year ended 2010/11 under the previous application of TD 2008/28. During the year, the company issued an interest-free loan to one of its shareholders for $55,000. The amount of the deemed dividend would be limited to $50,000 (the value of the distributable surplus).
However, under the new application of TD 2012/10, which includes income tax payable at year end, the amount of the deemed dividend would be limited to $26,000 ($50,000 minus $24,000). This creates a tax benefit for a taxpayer who falls under the provisions of Division 7A, as $24,000 less income is included in their deemed dividend. ❍
Disclaimer
The views in this article are those of the authors and do not represent the views of Deloitte Private or Deloitte Touche Tohmatsu or any of its related practice entities. This article is provided as general information only and does not consider anyone’s specific objectives, situation or needs. You should not rely on the information in this article.
