Chartered Accountants Australia and New Zealand (CA ANZ), together with CPA Australia, have lodged a submission to the Australian Taxation Office (ATO) on TD 2025/D2 Income tax: disregarding certain payments under section 109R of the Income Tax Assessment Act 1936 in determining how much of a loan has been repaid in situations where notional loans are involved (Draft TD).

The Draft TD sets out the ATO’s view that:

• Section 109R can apply to disregard certain loan repayments made to a private company where the repaying entity is taken to have obtained a loan from the company by the interposed entity rules in sections 109T and 109W of the Income Tax Assessment Act 1936 (ITAA 1936).
• Where a private company is taken to have made a notional loan under sections 109T and 109W of the ITAA 1936, section 109R of the ITAA 1936 can apply to disregard certain repayments when determining how much (if any) of that loan has been notionally repaid.

We support addressing the mischief raised in the Draft TD, being the repayment of notional loans that arise under sections 109T and 109W where the repayment is dependent on another loan being made. However, we believe the way sections 109R, 109T and 109W are currently drafted does not support section 109R applying in situations where notional loans are involved. 

Rather than finalising a TD which pushes the interpretation of the law beyond the text of the provisions, we would strongly support advocating for a legislative fix to Division 7A. In the meantime, the ATO could issue a Taxpayer Alert highlighting the application of Part IVA to the mischief raised in this TD.

If the TD proceeds, additional guidance is needed on what situations the ATO will apply its views. Furthermore, as the Draft TD acknowledges the potential for double taxation due to the operation of section 109R, some clarity on the Commissioner’s order of applying these rules where double taxation applies would be helpful.