Practice Statement– transitional application of Commissioner’s discretion 
 
On 30 July 2007, the ATO released a practice statement, PS LA 2007/20, on the transitional application of the Commissioner's discretion under section 109RB of the Income Tax Assessment Act 1936 (ITAA 1936) to disregard a deemed dividend under Division 7A where it was a result of an honest mistake or inadvertent omission. According to the ATO in their press release, this gives business owners a one-off opportunity to correct past mistakes regarding payments and loans from their private companies and avoid penalties under Division 7A. 
 
PS LA 2007/20 provides for the following:

• It provides taxpayers with a method of correcting errors made in the past without having to individually write to the Commissioner to exercise his power to disregard each deemed dividend separately  
  
• The so called 'corrective action' required is that a section 109N complying loan agreement is put in place and a repayment is made to put the taxpayer into the same position as if all minimum yearly repayments had been made.

• Remove the automatic debiting of the private company’s franking account when there is a deemed dividend, with effect from 1 July 2006  
  
• Introduce a legislative discretion (applying from the 2001-02 income year onwards) to allow the Commissioner to, subject to certain conditions being satisfied, either disregard a deemed dividend or allow it to be franked if the deemed dividend arose from an honest mistake or inadvertent omission by the taxpayer 
  
• Provide a discretion to the Commissioner to disregard a deemed dividend where minimum yearly payments have not been made on a loan because of circumstances beyond the control of the taxpayer  
  
• Allow a ‘payment’ to be converted to a loan that can be either fully repaid before the private company’s tax return lodgement day for the year of income or be placed on a commercial footing on the terms of section 109N of the ITAA 1936  
  
• Provide for the amount of deemed dividend to be the amount of the shortfall in the income year where the minimum yearly repayments under a loan fall short of the required amount by the due date  
  
• Allow a Division 7A compliant loan to be made between an entity, which is interposed between a private company and a shareholder, and a shareholder of the private company or its associate where a payment or loan is made by the interposed entity to the shareholder/associate  
  
• Repeal section 108 of the ITAA 1936, which only has residual operation since the introduction of Division 7A  
  
• Ensure that Division 7A compliant loans will not attract FBT.