Were loans made by the company to its shareholders?
The general ledger for the company in respect of both the 2012 and 2013 income years contained a ‘Shareholder Loan Account’ which disclosed what the AAT considered to reflect numerous advances made by the company to the taxpayers during the relevant income years that related to household, or other personal expenditure that was paid for from the Company’s bank account.
Using the opening and closing balances for the ‘Shareholders Loan Account’, it was determined that amounts advanced to the shareholders totaled $106,512, and $80,350 in the 2012 and 2013 income years, respectively, which the Commissioner treated as ‘deemed dividends’ under S.109D. The taxpayers claimed that the Commissioner was wrong in his assessment on the basis that:
“…the ATO has only considered withdrawals for living expenses and for non-concessional contributions and repayments of some personal loan (sic) and not given credit for contributing to the company for these living expenses such as Directors’ Fees/Distribution Income or proceeds from the sale of Principal Place of Residence”.
For example, the taxpayers submitted that when the company credit card was used to pay for personal expenditure (e.g., for the purchase of groceries), these payments represented a payment of directors’ fees by the company to the taxpayers.
On this basis, the taxpayers submitted that a reconciliation of all credits and debits in the accounts of the company should be performed at the end of each income year so that the net position of any funds owing to (or owed by) the shareholders could be determined.
However, the AAT had no trouble in concluding that the personal expenditure of the taxpayers running through the company’s accounts were loans. This was because, ‘aside from the fact that it was not a common experience for directors’ fees to be paid at supermarket check-outs’, it was not how the amounts had been treated in the company accounts. Instead, they had been identified in the general ledger by the characterization they bore, namely, as items of personal, or household expenditure. Further, accounting to the AAT, S.109D does not direct attention to an accounting exercise of assembling debits and credits to determine the net position of a shareholder’s indebtedness or contribution to a company at the end of any income year.
That is, the only amounts relevant so far as the blog is concerned is the amount of the loan and the amount of any repayments to the loan. That is, a shareholder’s equity or contribution to a company is entirely irrelevant to the exercise required under S.109D. In this regard, the AAT concluded that the amounts used to pay for personal items were ‘advances’ of money, or the provision of credit in the language of S.109D(3). They were not ‘directors’ fees’ at any time.