“Loan” from Private Company an “Honest Mistake”?

Under the tax law, certain payments and loans made by a private company to its shareholders or associates, and debts owed by its shareholders or associates that are forgiven by the private company, are taken to be unfranked dividends paid by the private company. However, there are specific exceptions to this rule.

In addition, the Commissioner has the general discretion to disregard the rule if the operation of the rule has arisen as a result of an “honest mistake” or “inadvertent omission” caused by the recipient of the dividend or the private company.

To assist taxpayers, the Tax Office has released a ruling which sets out the Commissioner’s views on the terms. The ruling notes that the onus is on the taxpayer to demonstrate that an honest mistake or inadvertent omission has occurred. The ruling states that the actual state of mind or belief of the person making the mistake or omission is in issue.