Draft Taxation Determination TD 2012/D1
This draft TD deals with the issue of when income tax of a private company will be a ‘present legal obligation’ for the purposes of the distributable surplus calculation under s 109Y(2) of Div 7A of Pt III of the ITAA 1936. The draft replaces TD 2008/28, which was withdrawn with effect from 11 January 2012 (see below).
Ruling
The draft provides that if a private company has a liability to pay instalments for an income year under Pt 2-10 of Sch 1 to the Taxation Administration Act 1953, and some or all of an instalment is unpaid as at 30 June, then the unpaid amount of that instalment is a ‘present legal obligation’ for the purposes of the distributable surplus calculation worked out at that time.
Furthermore, it also states that if a private company that is a full self-assessment taxpayer has an amount due and payable (after credits for instalments payable for the income year) by reason of s 5(4) of the ITAA 1997, then this amount is a present legal obligation for the purposes of the distributable surplus calculation worked out at 30 June of the income year which is subject to the deemed assessment under s 166A of the ITAA 1936. According to the draft TD, the fact that the tax is due on the day the return is lodged which is after the end of the year of income is not relevant for the purposes of the distributable surplus calculation.
The draft states that if the Commissioner issues a private company with an amended assessment for any income year, then the amount payable under the amended assessment will be a present legal obligation for the purposes of the distributable surplus calculation worked out at the end of the income year subject to the amended assessment.
The draft provides several examples to illustrate these matters, including the following:
Example 1
A private company (A Pty Ltd) has correctly self-assessed taxable income for the 2009/10 income year of $100,000, and the fourth quarterly PAYG instalment of $7500 is unpaid as at the end of the income year (30 June 2010). The first three PAYG instalments totalling $22,500 have already been paid on time. The amount of the unpaid instalment at 30 June 2010 of $7500 is a present legal obligation of A Pty Ltd for the purposes of the distributable surplus calculation under s 109Y(2) of the ITAA 1936 at 30 June 2010.
Example 2
A private company (M Pty Ltd) is not registered for GST and does not have an instalment rate for the 2006/07 income year for the purposes of Pt 2-10 of Sch 1 to the TAA. During the 2006/07 income year, M Pty Ltd made a $5000 loan to a shareholder Beth which was neither repaid nor put under a qualifying s 109N written agreement before M Pty Ltd’s lodgement day for the 2006/07 income year. M Pty Ltd’s 2007 income tax return was lodged on 28 February 2008 with income tax due and payable of $15,000.
In determining the amount of the dividend taken to be paid to Beth at the end of the 2006-07 income year under Div 7A, M Pty Ltd’s 2006/07 income tax of $15,000 is taken into account for the purposes of the distributable surplus calculation under s 109Y(2) at 30 June 2007. It is a present legal obligation for the purposes of the distributable surplus calculation under s 109Y(2) at 30 June 2007.
Date of effect
When finalised, the determination is proposed to apply both before and after its date of issue.
Withdrawal of 2008 TD
Following the issue of the draft TD, the Tax Office withdrew TD 2008/28 (When is income tax of a private company a ‘present legal obligation’ for the purposes of the distributable surplus calculation under s 109Y(2) of Div 7A of Pt III of the ITAA 1936?) with effect from 10 January 2012. The determination was withdrawn as the Tax Office’s views have changed following the decision of the Full Federal Court in FCT v H [2010] FCAFC 128, and are now expressed in the draft TD.
Addendum
For the same reasons, the Tax Office issued an addendum to TD 2007/28 (What is a ‘present legal obligation’ of a private company for the purposes of s 109Y(2) of Div 7A of Pt III of the ITAA 1936) to cater for the changes in the Commissioner’s views now expressed in draft TD 2012/D1. The addendum applies both before and after the date of issue of the draft TD.
