The AAT has exercised the discretion to disregard the operation of Div 7A on the grounds there was an honest mistake in not properly documenting loans by a private company to a shareholder.
The taxpayer was a shareholder and director of a building company. In the 2005 income year, the company transferred money to the taxpayer on a number of occasions. The taxpayer said that he instructed his accountant to treat each transfer as a loan. However, the money transferred was recorded as “trade creditors” in the company’s accounts and 2005 tax return.
Sometime after the 2005 tax return was lodged in June 2006, the taxpayer’s accountant arranged for the taxpayer to sign a simple loan agreement covering past and future payments to the taxpayer. The agreement, which was not dated, required the taxpayer to pay interest at the benchmark interest rate published by the ATO, but it did not specify a term for the loans.
The company also transferred various amounts to the taxpayer in the 2006 and 2007 income years. These amounts were recorded as loans in the company’s accounts.
The Commissioner applied Div 7A of the ITAA 1936 to treat the payments made in the 2005, 2006 and 2007 income years as assessable dividends. The taxpayer, however, argued that the Commissioner should have exercised his discretion under s 109RB to effectively ignore the application of Div 7A.
As regards the 2005 payments, the AAT was not satisfied that they were loans and refused to exercise the s 109RB discretion. (A 25% administrative penalty was imposed on the basis that the taxpayer and his accountant had failed to take reasonable care.)
As regards the 2006 and 2007 payments, the AAT decided to exercise the discretion as there had been an honest mistake in failing to document the loans properly. Significant factors were that Div 7A had not applied previously and that during the 2007 income year the taxpayer paid $150,000 to the company, whereas by 30 June 2006 he had only borrowed $139,189. This meant that the minimum annual repayments had been made.
(AAT Case [2012] AATA 755, Re Building Company Owner and FCT, AAT, Ref No: 2010/3520-3522, Frost DP, 1 November 2012.)
[LTN 210, 30/10]