Honest mistake in not documenting private company loans

Published on December 18, 2012 at 12:00 AM

A taxpayer has been, in most part, successful before the Administrative Appeals Tribunal (AAT) in relation to a matter concerning loans from a private company. These loans were made to him, over various years, as a shareholder and director of the private company. The ATO had treated the loans, which were made in the 2005, 2006 and 2007 income years, as assessable dividends.

The AAT sided with the ATO in relation to the 2005 loans. However, the AAT decided differently in respect of the 2006 and 2007 loans. It found that a discretion under the tax law should be exercised to disregard the deemed dividends because it found that there was an “honest mistake” in failing to properly document the loans.

TIP: The Tax Commissioner has the ability to disregard a deemed dividend, or allow it to be franked, if certain conditions are met. Generally, a taxpayer must apply to the Commissioner to ask for the discretion to be exercised, and must be able to demonstrate that the failure to meet the requirements of the law was due to an honest mistake or an inadvertent omission.

In making his decision, the Commissioner must have regard to various factors specified in the law. Please contact our office if you have any questions.

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