Div 7A and deemed dividends

The Tax Office has issued Practice Statement Law Administration PS LA 2011/29 concerning Div 7A and the Commissioner’s discretion to disregard deemed dividends under s 109RB of the ITAA 1936. Section 109RB confers on the Commissioner a discretion to disregard a deemed dividend that arises under Div 7A where a taxpayer inadvertently triggers a deemed dividend as a result of an honest mistake or inadvertent omission.

Process

The Practice Statement sets out the Commissioner’s policy in exercising this discretion and provides that it involves a two-step process as follows:

• Establishing that the Commissioner is empowered to exercise the discretion because the deemed dividend arose, on the balance of probabilities, as a result of an “honest mistake” or “inadvertent omission”; and
• Deciding whether the discretion should be exercised having regard to the matters outlined in s 109RB(3) and, if so, what conditions, if any, should be imposed.

The Practice Statement also provides that in forming an opinion, Tax Officers must adhere to administrative law principles – the main obligations of which are:

• the practice statement must not be applied in a rigid or inflexible way;
• each case must be considered on its merits;
• all relevant considerations must be taken into account (as outlined in s 109RB(3)), and no irrelevant considerations must be considered;
• the decision must be made in good faith and without bias; and
• the decision must be made independently and must not be made at the direction of another person.

However, the Practice Statement also states that the guidance contained within it does not fetter the exercise of the discretion when it is applied to the circumstances of a particular case.

Other matters

The Practice Statement also emphasises the following matters:

• many of the factors that are relevant in determining whether a mistake or omission was honestly or inadvertently made will also be relevant in determining whether it is appropriate for the discretion to be exercised;
• as a general proposition, evidence gathered to establish honesty or inadvertence will also be relevant when deciding whether the discretion should be exercised;
• Tax Officers must also have regard to the objects of Div 7A as a whole, which is an integrity provision aimed at preventing the tax free distribution of company profits (which means that not all honest mistakes or inadvertent omissions will result in the exercise of the commissioner’s discretion);
• there is no presumption that the discretion should be exercised (or not exercised); and
• Taxation Ruling TR 2010/8 outlines what constitutes an honest mistake or an inadvertent omission and should be read in conjunction with the Practice Statement.

Finally, the Practice Statement states that the Commissioner considers the discretion in s 109RB is integral to the substantive operation of Div 7A and this means that the exercise (or non-exercise) of the discretion goes directly to the question of whether a dividend is taken under Div 7A to have been paid. As a result, it emphasises that it is expected that Tax Officers conducting compliance activity involving Div 7A will, before any assessment is made, notify taxpayers of the potential availability of the discretion and invite their submissions on its operation.