Howard and Commissioner of Taxation (Taxation)

The Administrative Appeals Tribunal considered the dispute between the applicant, Howard, and the Commissioner of Taxation concerning the tax treatment of a deemed dividend. The applicant sought to have the Commissioner's decision, which affirmed an objection decision, reviewed.

The primary legal issue before the Tribunal was whether the Commissioner had erred in exercising, or failing to exercise, a discretion under section 109RB of the *Income Tax Assessment Act 1936* (Cth). This discretion allows the Commissioner to disregard the operation of Division 7A of the Act, which treats certain loans from private companies to shareholders as dividends, or to allow such a dividend to be franked. The applicant contended that the conditions for exercising this discretion, specifically that the deemed dividend arose from an honest mistake or inadvertent omission, were met.

The Tribunal examined the requirements of section 109N of the *Income Tax Assessment Act 1936*, which outlines conditions under which a loan will not be treated as a dividend. These include the loan agreement being in writing, an appropriate interest rate, and a maximum term. The applicant argued that while the loan agreement met the written and interest rate criteria, it failed the maximum term requirement because the security provided by a registered mortgage over real property was a second mortgage, not a first, thereby limiting the loan term to less than the 25 years permitted for a first mortgage secured by 100% of the property's value. The applicant submitted this failure was due to an honest mistake or inadvertent omission by the applicant or their accountant, driven by the urgency to finalise the loan agreement by 30 June 2009.

Ultimately, the Tribunal accepted the Commissioner's submissions and found no reason to remit the shortfall interest charge. The objection decision of 26 June 2017 was affirmed.