s109RB: Division 7A Corrections for Tax Agents

s109RB gives the Commissioner discretion to relieve a Division 7A deemed dividend caused by an honest mistake or inadvertent omission. First check whether ordinary correction is still available. An unlodged return does not keep every correction deadline open.

Identify the Mistake and Its Timing

Identify the transaction and the affected income year before deciding how to correct it. A new loan, a forgiven debt and a missed repayment on an existing loan can have different consequences.

Start your review with the Division 7A transaction and relationship checks. Record the lender company, recipient and shareholder or associate relationship. Then identify the payment, advance, debt forgiveness or repayment shortfall that needs attention.

For each affected year, write down the company’s return due date and whether it has already lodged. The company’s lodgment day is the earlier of its actual lodgment date and its due date. Lodging early can therefore bring the boundary forward. Leaving a return overdue does not extend it.

Keep the annual repayment test separate. For an existing complying loan, section 109E tests repayments made during the company’s income year. Finding a shortfall while preparing an unlodged return after year-end does not restore that repayment period.

Check Whether Ordinary Correction Remains Open

A genuine repayment or complying-loan arrangement can prevent a deemed dividend when the relevant legal requirements and timing are met. The ATO’s corrective-action guidance explains the company lodgment boundary.

For a new loan, check whether the borrower can actually repay it before that boundary. Alternatively, consider whether the agreement can meet section 109N in time, including its written terms, interest requirements and maximum term. A payment converted into a loan also needs a real underlying arrangement.

Check how any repayment is funded. Section 109R can disregard repayments involving intended reborrowing or funds borrowed from the company. A bank transfer alone does not establish an effective Division 7A repayment.

Keep the following distinction in your file.

• Incorrect: changing a journal description to show an earlier repayment or dating a newly signed agreement as though it already existed.
• Correct: recording when the repayment or agreement actually occurs, with the supporting bank records or executed documents.

If the mistake concerns debt forgiveness, establish what legally happened before choosing a response. A new journal entry does not by itself undo an earlier release of the debt.

Before the Deadline

In this hypothetical case, a private company has lent money to a shareholder. Its return remains unlodged and its due date is still ahead. The practice finds the undocumented loan during preparation.

The borrower repays the loan from their own funds before the company’s lodgment day. The practice confirms the repayment counts under Division 7A and retains the bank evidence. On those assumptions, the loan can be addressed through the ordinary rules without relying on s109RB.

After the Deadline

In this separate hypothetical case, a borrower misses part of the minimum yearly repayment on an existing complying loan. The practice discovers the shortfall after the company’s income year has ended, while the return is still unlodged.

A payment made now cannot become a repayment made during the earlier income year. Record its actual timing and assess the deemed-dividend position. The payment can be relevant corrective action for a relief assessment, but it does not erase the shortfall automatically.

What s109RB Changes

Under section 109RB, the Commissioner can disregard a deemed-dividend result or permit a deemed dividend to be franked. The result must arise because of an honest mistake or inadvertent omission by a relevant entity.

The relevant entity can be the recipient, private company or another entity whose conduct contributes to the result. An adviser’s mistake can therefore be relevant. Identify whose conduct caused the problem instead of assuming that every error belongs to the borrower.

TR 2010/8 explains that the mistake must affect the Division 7A result. A genuine misunderstanding of facts or law can qualify. Deliberate avoidance, deliberate indifference or wilful blindness cannot. Ignorance alone does not establish the required mistake or omission.

Establishing that threshold leaves a separate discretionary decision. The Commissioner considers how the error arose, corrective action and its speed, previous Division 7A outcomes and other relevant matters. A favourable decision can carry conditions.

The client takes corrective action. The Commissioner exercises the discretion in writing. Completing a catch-up payment or signing a new agreement does not itself exercise s109RB or guarantee relief. Any conditions attached to disregarding the result must also be satisfied.

Keep the Evidence Before Finalising

Keep the original evidence while you assess the current return’s treatment. The ATO’s PS LA 2011/29 gives greater weight to contemporaneous evidence than later assertions.

Use a separate record for each transaction that triggers Division 7A.

1. Preserve the original loan agreement, account entries and bank records. Include any debt-release document and the repayment calculations for the affected year.
2. Build the chronology. Record when the transaction occurred, what each party understood, when advice was given and how the practice discovered the mistake.
3. Retain the advice and approvals that explain the conduct. Keep correspondence, director or trustee resolutions and evidence of previous Division 7A issues.
4. Record corrective action as it happens. Separate completed repayments or signed documents from proposals, and explain any delay.
5. Write the unresolved tax-treatment decision in the return working papers. Name the affected recipient, year and amount, the ordinary correction considered and the issue requiring advice.

Get specialist tax advice where the deadline has passed and the treatment depends on discretion. Escalate disputed facts, uncertain agreement validity or repeated errors as well. A repayment failure can also raise other statutory relief provisions with different tests.

Before finalising, the file must show which corrective steps actually occurred and why the practice adopts its return position. If relief remains undecided, record that uncertainty and resolve the treatment on advice. An expected favourable decision is not an exercise of the Commissioner’s discretion.