Section 109T: Division 7A Funding Chains

Section 109T can treat private-company funding through another entity as a payment or loan to the ultimate recipient. Trace the real transactions first, then determine the attributed amount and the Division 7A treatment. A matching bank transfer alone does not settle the result.

When an Interposed Entity Changes the Analysis

An interposed entity brings an indirect funding arrangement into the Division 7A analysis. The target entity is the recipient at the end of that arrangement. Your workpaper must connect the company’s funding to that recipient and identify their shareholder or associate relationship.

Start by identifying what actually happened. A company lending directly to its shareholder presents a direct-loan question. Company funds passing through another entity require a chain analysis. A trust allocating income to a company without paying it creates an entitlement question that needs its own analysis.

The High Court’s decision on unpaid trust entitlements rejects treating mere failure to demand payment as a loan on the facts considered. The resolutions created separate trusts, without a debtor-creditor relationship. That does not establish that every arrangement involving a trust falls outside Division 7A.

Read the deed and resolutions before labelling an entitlement a company advance. Identify any later agreement, payment or loan separately. Use the unpaid present entitlement analysis for the company-beneficiary question, including the relevant trust provisions.

Trace Every Payment and Relationship

Build a transaction map from each entity’s bank records and loan accounts, keeping legal capacity beside every entry. A corporate trustee acting for a trust must be distinguished from that company acting for itself.

For each transfer, record the payer, recipient and amount. Add its sequence, income year, bank reference and corresponding account entry. Retain the agreement or instruction explaining its purpose. Then map ownership and associate relationships separately, using the documents that establish them.

A Fictional Three-Transfer Chain

In this fictional example, the shareholder owns the funding company and the intermediary company. The trust’s deed and beneficiary records establish the relevant relationships for review.

Sequence	Actual transfer	Evidence to reconcile
First	Funding company lends $120,000 to intermediary company	Both bank statements, advance approval and matching loan accounts
Two business days later	Intermediary company lends $90,000 to the trustee for the trust	Trustee capacity, both bank entries and signed loan record
Next business day	Trustee lends $70,000 to the funding company’s shareholder	Trust bank debit, shareholder receipt and borrower account
After those transfers	Shareholder repays $14,000 to the trustee	Receipt and reduction of the actual borrower account

The funding instructions expressly identify the planned $70,000 shareholder advance. The intermediary retains $30,000 and the trustee retains $20,000. Together with the shareholder’s $70,000 receipt, those amounts reconcile to the original $120,000.

Keep the $14,000 repayment separate from the initial funding reconciliation. It reduces the actual shareholder loan to $56,000. It does not show that the funding company received $14,000.

Incorrect: concluding that section 109T applies because the entities share an owner. Correct: using the instructions and reconciled transfers to explain why the company funded the shareholder advance. Common ownership supplies context, while the arrangement conclusion needs the transaction evidence.

Apply Section 109T to the Arrangement

Section 109T asks whether a reasonable person would conclude that the company funded the intermediary solely or mainly under an arrangement to pay or lend to the target. Consider all the circumstances. Different amounts or transaction order do not defeat the test.

Read the current interposed-entity provisions alongside the workpaper. Separate the arrangement conclusion from the attributed amount, timing and final dividend result. Sections 109V and 109W govern payments and loans respectively.

The ATO’s TD 2018/13 confirms that an ordinary commercial first transaction can fall within section 109T. Calling the company’s advance commercial does not answer why it formed part of the wider arrangement.

Record facts that support and contradict the proposed arrangement. Compare the client’s instructions with the actual use of funds. An independently funded transaction needs its own explanation if you exclude it from the chain. Do not omit it solely because its amount differs.

Guarantees Need Their Own Branch

Where the company guarantees funding, analyse sections 109U and 109UA separately. Section 109UA addresses a guarantee that creates a present payment liability, subject to its exceptions. A contingent guarantee and a liability following default require different entries in your workpaper.

Request the guarantee, lender demand and borrower indemnity terms. Record whether a liability has arisen, who owes whom and any amount already treated as a dividend. A bank loan supported by a company guarantee cannot simply be entered as a company cash advance.

Reconcile the Actual and Deemed Amounts

Show actual transfers and tax attribution in separate columns so the same money is not recorded as another receipt. The ATO’s interposed-entity guidance places the ordinary attributed payment or loan when the intermediary pays or lends to the target. Guarantee-default arrangements need their separate timing analysis.

The Commissioner determines the amount. The factors in TD 2011/16 include actual amounts, arm’s length consideration and genuine repayments. The terms and performance of loans within the arrangement also matter. The borrower’s promise to repay is not itself the arm’s length consideration that eliminates the notional loan.

A Hypothetical Payment Chain

Assume a private company pays $60,000 to an intermediary under instructions to pass the money to its shareholder. The intermediary pays $50,000 to the shareholder and retains $10,000. There is no repayment obligation or consideration for services in this example.

For illustration, assume the Commissioner determines a $50,000 attributed payment. The shareholder receives $50,000 once. The $50,000 attribution is a tax treatment of that receipt, not another bank transfer. Record the remaining Division 7A checks before treating it as an assessable dividend.

The Loan Chain After a Repayment

Return to the three-transfer example and assume the Commissioner determines a $70,000 notional loan. Under section 109W(3), the $14,000 actual repayment gives a $14,000 notional repayment: $14,000 multiplied by $70,000 divided by $70,000.

Workpaper item	Actual shareholder loan	Assumed notional loan
Original amount	$70,000 owed to trustee	$70,000 attributed from funding company
Repayment	$14,000 paid to trustee	$14,000 recognised proportionately
Balance for further analysis	$56,000	$56,000
Cash receipt from attribution	None	None

These figures assume genuine repayment and no other adjustments. If the determined notional amount differs from the actual loan, apply the statutory fraction to that amount. Keep the assumption visible beside the calculation.

Check Overlap Before Recording a Dividend

Section 109T(3) switches off this attribution where the first transaction itself produces a Subdivision B deemed dividend. Check that result before attributing a second amount. A declared ordinary dividend and a Division 7A deemed dividend are different findings.

Review existing assessments and the treatment of each actual transaction. Where the target receives taxable remuneration or payment for services, retain the assessment and arm’s length consideration evidence for the amount determination. Do not automatically add the whole receipt again.

Check repayment funding as well as the receipt. A replacement advance requires review of the repayment rules and the arrangement as a whole. Keep the actual debt outstanding in the accounts unless the legal transaction changes it.

Keep Elections and Loan Compliance Separate

An interposed entity election concerns membership of a family group under the trust rules. The ATO’s family-group guidance explains that separate purpose. An election does not determine whether company funding reaches a shareholder under section 109T. Use the family trust election guide for that question.

For a notional loan, section 109X uses the actual loan agreement when applying section 109N. It also modifies the ongoing repayment analysis. Check the Division 7A loan conditions after identifying the correct transaction and borrower. Assess any payment under the relevant payment rules, including the distributable-surplus limit, without treating the traced amount as the final dividend automatically.

Finish the workpaper with the target entity, evidence supporting the arrangement and proposed attributed amount. Record the actual loan agreement and recognised repayments where relevant. Assign the remaining tax treatment and review to a named staff member before finalising the client’s return.