Company Loans Treated as Income

Re Martinazzo and FCT [2009] AATA 61

The taxpayer was employed by a family partnership and paid wages. The partnership was restructured and the business sold from the partnership to a company.

The taxpayer continued to be employed in the business but instead of being paid wages he received loans from the company operating the business. The loans were made to him with the same periodicity and in the same amount as the wages previously received. The partnership which had previously owned the business and paid wages to the taxpayer continued to fund the company to make the loans.

The Administrative Appeals Tribunal held that the loans had the hallmarks of revenue and were to be treated as wages. Treating a payment as a loan requires evidence of an intention to repay but in this case the taxpayer was found neither to have expected nor intended to repay the loans.

There are echoes of this decision (although it was not cited) in the New Zealand Taxation Review Authority's decision in Case Z23 which recently held that a pattern of continuous loans by a series of trusts to their business executive/trustee/beneficiary had the characteristics of revenue and were part of a tax avoidance arrangement.