Various loan and payment transactions between the entities controlled by the taxpayer fell afoul of Division 7A, thus giving rise to deemed dividends.
Mr. and Mrs. Abichandani (‘the taxpayers’), were the directors and shareholders of a private company, Abichandani Associates Pty Ltd (‘the company’). It is not clear from the facts what the company’s main business and/or investment activity was but the taxpayers themselves were experienced accountants and registered tax agents.
During the 2012 and 2013 income years, the company made several loans and payments to the taxpayers as well as to certain entities they controlled, including to a partnership (the partners in the partnership were the taxpayers). No (complying) loan agreements had been put in place in respect of any of the loans made by the company.
The Commissioner assessed the partnership and the shareholders for each of the relevant income years on the basis they had derived deemed dividends under Division 7A.
The taxpayers objected to the amended assessments. The objections were denied. The taxpayers, therefore, sought a review of the objection decision by the Administrative Appeals Tribunal (‘AAT’). The AAT was required to consider the following four issues relating to the 2012 and 2013 income years:
1) Whether the company made loans to the partnership and the taxpayers (in their capacity as shareholders of the company), and if so, in what amount.
2) Whether the transfer of units in a unit trust and various payments made to the taxpayers engaged the deemed dividend provisions in S.109C.
3) Whether the Commissioner’s discretion under S.109RB was available to disregard the deemed dividends, and if so, whether that discretion should be exercised in the taxpayer’s favour.
4) Whether the administrative penalties imposed on the taxpayers were excessive, and whether any of the penalty should be remitted (the Commissioner had imposed an administrative penalty of 50% of the shortfall amount on the basis the shortfall arose due to recklessness).
Decision of the AAT
Ultimately, the AAT affirmed that the various loan and payment transactions between the entities controlled by the taxpayer fell afoul of Division 7A, thus giving rise to deemed dividends. The reasoning behind the AAT’s decision in this regard will be discussed in future blog updates.