02 Nov 12 Deemed dividends arose through “honest mistake or inadvertent omission” - Re Building Company Owner
A taxpayer who received payments from a company of which he was a shareholder and director has received the benefit of an exercise, by the AAT, of the Commissioner’s discretion under s 109RB of the ITAA 1936, because the deemed dividend payments arose as a result of an honest mistake or inadvertent omission.
Section 109RB gives the Commissioner a discretion to disregard or modify the effect of ss 109C and 109D, which would otherwise treat payments by a company as deemed dividends. Section 109RB says that the discretion may be exercised if the “deemed dividend” result arose “because of an honest mistake or inadvertent omission” by the recipient of the payment, by the company itself, or by “any other entity whose conduct contributed to that result”.
The taxpayer received payments from the company in each of three consecutive income years. In the first of those years, the company’s accounts did not treat the payments as a loan to the taxpayer and, although there was a purported loan agreement, it was not entered into until after the company’s return for that year had been lodged. Accordingly, it was accepted that the payments in that year were not loans to the taxpayer, and there was no room for exercise of the discretion.
The loan agreement covered payments made in the two subsequent income years, but the agreement was not sufficient for Div 7A purposes in that it provided no term for the loan. The AAT accepted that this was a mistake on the part of the taxpayer’s accountant, and that it was an honest mistake. Having assessed the factors listed in s 109RB(3) to which the Commissioner is to have regard when exercising the discretion under that section, the AAT decided that the discretion should be exercised in the taxpayer’s favour in those income years, thereby disregarding the deeming of the relevant payments as dividends.
Re Building Company Owner and FCT  AATA 755 (Deputy President S E Frost, 1 November 2012).