Director’s loan repayments ruling

Failure by director to make repayment of private company loan gave rise to dividend

The AAT has held that a taxpayer’s failure to make minimum yearly repayment on a loan taken by him from a private company where he was the sole director and shareholder, was not due to circumstances beyond his control.

The AAT said that taking the dividend as paid and the imposition of the taxation obligation, would not cause undue hardship to the taxpayer.


The taxpayer was the sole director and shareholder of two companies (Company #1 and Company #2). Company #1 was a private company for the purposes of the relevant subsections of ITAA 1936 s 109. By 30 June 2010, it made profits from the sale of a property development and made a loan to the taxpayer of $1,408,700. At that point, Company #1’s only potential income source was dividends from Company #2, which was also a property developer. Company #1 ceased trading after the sale of its property development during the year ended 30 June 2010, and it was liquidated in December 2015. A liquidator was appointed for Company #2 in January 2015.

The Commissioner issued an assessment for the year ending 30 June 2015 based on the taxpayer’s self-assessment. The taxpayer objected to the assessment and sought review by the AAT when the Commissioner disallowed the objection.

Before the AAT, the taxpayer did not dispute either his failure to make any payment towards the minimum yearly repayment or the Commissioner’s calculations. At issue was whether the exception under s 109Q(1) to the non-payment of the yearly repayment minimum, or in this case the available surplus, being taken to be a dividend paid, applied. Under s 109Q(1), the taxpayer must satisfy the AAT that he:

  • did not make the minimum yearly payment because of circumstances beyond his control (s109Q(1)(b)(i)), and
  • would suffer undue hardship if he was treated as having derived the deemed dividend (s109Q(1)(b)(ii)).

The taxpayer contended that the Global Financial Crisis (GFC) in 2008 and its continuing effect on economic conditions in the relevant year was the cause for his not paying the minimum yearly payment.


The AAT held that the taxpayer’s failure to make the minimum yearly repayment in the relevant year pursuant to s 109E was not due to circumstances beyond his control for the purposes of s 109Q(1)(b). Taking the dividend as paid, and the imposition of the taxation obligation, would not cause undue hardship to the taxpayer.

The AAT found that the GFC or its ongoing effects or the circumstances of Company #1 and Company #2 were events that the taxpayer knew of at the time he made relevant decisions and he factored in that knowledge in making his decisions and in that sense did something about them. If a person chose to put himself into a position where he must meet certain financial obligations, if the operation of inevitable or foreseeable circumstances or the foreseeable financial environment, caused him not to be able to meet those financial obligations, that could not be considered to be beyond his control.

Moreover, the AAT found that the records of the taxpayer’s superannuation fund, his concessions on the unencumbered value of his property, the amounts that he was expending on home mortgage repayments and the results of the development of a property, indicated that he always had sufficient financial capacity to make the minimum yearly repayment and chose not to do so. This choice was also within the taxpayer’s control.

The AAT noted that while there might have been some hardship in that the taxpayer may have to sell assets or rearrange his affairs, that was neither unreasonable nor an undue hardship. The taxpayer had structured his affairs over an extended period which resulted in him receiving significant benefits through those structures, in particular receiving hundreds of thousands of dollars through his superannuation fund while neither he nor the entities through which that income has been generated have met their tax obligations.

VCJN v FC of T, 2019 ATC 10-496, [2019] AATA 968, Deputy President Boyle, 23 May 2019.