Beneficiary taxed on badly documented loan from trust

September 10, 2019

The Administrative Appeals Tribunal (AAT) in its recent decision (on 11 July 2019) Howard v Commissioner of Taxation held that a loan made by a company to a beneficiary of a trust through an interposed entity constituted a deemed dividend under Subdivision E of Division 7A of ITAA 1936.

The Commissioner found a loan of $3.6 million made to the taxpayer was a deemed dividend under sections 109T and 109W of ITAA 1936. The applicant appealed this decision to the AAT.  The applicant argued that the loan amount should be nil on the basis that the payment or loan made from the private company to the interposed entity is included as assessable income in the interposed entity or some other entity.

The tribunal rejected this claim and concluded that the arguments raised by the taxpayer were not relevant considerations. They also denied the taxpayer’s request for the Commissioner to exercise section 109RB discretion because the failure to comply was not due to an honest mistake, or inadvertent omission.

DAA Comment

This decision narrowed the circumstances where the Commissioner may exercise s109RB discretion in favour of the taxpayer, as here the taxpayer had obtained professional advice. The AAT also seemed to be reinforcing the ATO’s position to disregard the fact that payments/loans from a private company had been included in the interposed entity’s assessible income.

It is also worth highlighting that the applicant in this case was unable to provide consistent evidence of the circumstances surrounding the loan arrangement. In fact, one of the disputes in the case was around the timing of when this loan was entered into. It is important for taxpayers to keep contemporaneous documentation that supports any loan arrangements with related private companies.

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