Extreme care needs to be exercised when seeking to have a company (such as a private or family company) transfer property or provide monies, or even provide guarantees, to shareholders and/or their associates including family members, warns commercial lawyer and partner TERRY MORGAN.
An associate of a shareholder can include a relative (such as a spouse, parent, grand parent, brother, sister, uncle, aunt, nephew or niece), and includes related entities. This list is not an exhaustive list of those persons or entities which may be considered to be associates.
Any of the following may constitute the payment of a dividend in accordance with the Income Tax Assessment Act:
- A transfer of property;
- A gift of property;
- The making of a loan to a shareholder or an associate; or
- The provision of a guarantee to secure the indebtedness of a shareholder or an associate.
For example, a family company called Family & Co decides to assist one of its shareholders or an associate of a shareholder to purchase property by the making of a gift of money.
That gift of money, subject to certain provisions of the Act which are referred to below, would, to the extent described in the Act, be deemed to be a dividend in the hands of the person to whom the money was gifted. As a dividend, that amount of money would need to be declared in the income tax return of the person who received that money.
Subject to a number of calculations which are required to be undertaken in accordance with the terms of the Act, the total amount of the gift may not necessarily be a deemed dividend.
It is possible that the treatment of any transfer of property or gift of monies is able to be treated as a loan if the company, and the person to whom any such transfer of property or gift was made, enter into a loan agreement.
If the loan agreement is secured by a mortgage over real property, the mortgage has been registered and the value of the security is at least 110% of the amount of the loan, then the term of the loan for the person who received the property or gift is able to be 25 years.
If the loan is unable to be secured by a mortgage over real estate as described above, the loan can only be a loan for 7 years.
The Income Tax Assessment Act also prescribes that minimum repayments will be made each year in respect of such loans and that interest at a prescribed rate is to be charged.
The provision of a guarantee by a company to secure the debts of a shareholder or an associate of a shareholder can also attract the same provisions as set out above.
In our Family & Co example, if it provides a guarantee to a financial institution to secure the liabilities of a person (let’s call him John Smith), where John Smith is a shareholder or an associate of a shareholder of Family & Co, then the provision of that guarantee may give rise to a deemed dividend, to be treated in accordance with the above comments.
Should John Smith at any time default in the terms of his loan agreement with the financial institution, then technically, as Family & Co is then liable to meet the obligations of John Smith, that obligation can be treated as a deemed dividend in accordance with the above comments.
Any transactions pursuant to which a company is to:
- Transfer property to;
- Make a gift of monies to; or
- Provide some form of security for a shareholder or an associate of a shareholder need to be examined very closely so as to ensure that there are not unintended income tax liabilities for the recipient of the transfer of property gift or guarantee.
