Botella and Commissioner of Taxation (Taxation and business) [2026] ARTA 604 (16 April 2026)

In this decision of the Administrative Review Tribunal, the four taxpayer objection decisions of the Commissioner of Taxation, which were all unfavourable against the taxpayer, were all affirmed by the Tribunal. The taxpayer failed to establish before the Tribunal that their tax assessments were excessive.

The Commissioner proposed to, for the purpose of the Tribunal proceedings, treat the Division 7A based arguments (the first objection decision), and the dividend stripping based arguments under section 177E of the ITAA 1936 (the second, third and fourth objection decisions), as being alternatives, such that the Commissioner would not seek to pursue tax payable under the dividend stripping provisions if the Division 7A arguments were successful. The Commissioner stated:

“given that the mischief against which both Division 7A and s 177E are directed, namely, the avoidance of tax on the distribution of profits substantially overlap, and that Part IVA [the dividend stripping provisions] is a provision of last resort”. This position was said to apply solely for the purpose of the Tribunal proceedings.

However as set out in the article below, both the Division 7A issue and the dividend stripping issue were considered and concluded on by the Tribunal, both in favour of the Commissioner.

The taxpayer, John Botella, operated a hydraulic plumbing, heating and air-conditioning business through a company PPD (shortened) from November 2007 as PPD’s sole director and sole shareholder.

The Loans - Division 7A - First Objection Decision

In the 2017/18 financial year, PPD’s financial statements showed current year earnings of $1,011,741 with retained earnings from prior years of $450,413. This totalled $1,462,154 retained earnings as at 30 June 2018.

There was no amount receivable by Mr Botella or the declaration of any dividend for that 2017/18 financial year, but the PPD accounts showed outstanding loans made to Mr Botella by PPD which remained unpaid at 30 June 2018 of $1,315,257.54.

These loan amounts would be found by the Tribunal to be deemed dividends due in part to the constitution of PPD’s Division 7A deemed loans clause failing to satisfy the meaning of a “written loan obligation”, given the restructure circumstances described below.

The Restructure - Dividend Stripping - Second, Third and Fourth Objection Decision

Business Transfer to PPS

On 15 February 2018, Mr Botella incorporated a new company PPS (shortened) for which he was also the sole director and sole shareholder.

In March 2018, the business of PPD was transferred to PPS. PPS would alter its shareholding so Mr Botella retained 80%, and 20% would be held by the general manager of the PPD business.

The transfer to PPS left PPD as a shell company holding $1,008,918 in retained profits and the $1,315,257.54 loan receivable from Mr. Botella.

Circular Payment From PPH

On 4 September 2018, Mr Botella incorporated another company PPH (shortened) for which he was also the sole director and sole shareholder. And on that day (the Dividend Stripping):

Mr Botella transferred all of his 100% shareholding in PPD to PPH so that he owned 100% of PPH and PPH owned 100% of PPD (and PPD no longer owned the business).

Mr Botella issued himself 1,009,018 fully paid shares in PPH as consideration for the transfer of 100% of his shares in PPD shares to PPH (he already owned 100% of PPH). This share-for-share exchange qualified for CGT rollover relief under Subdivision 122-A of the ITAA 1997, deferring the taxation of any capital gain on his disposal of his PPD shares.

PPD declared a franked dividend of $1,008,918 to be paid to PPH, with a franking credit of $382,693. Subsequently, PPH claimed a tax offset under Division 207 of the ITAA 1997 equal to the franking credit to reduce PPH’s tax payable on the dividend to nil, for the 2018/19 income tax year.

Later, on 21 September 2018 (the Circular Payment):

PPD didn’t have cash to pay the franked dividend, as it lent money to Mr Botella, so PPD issued a promissory note to PPH for $1,008,918, in satisfaction of the dividend noted above.

Then PPH endorsed the promissory note issued by PPD to lend that amount of $1,008,918 to Mr Botella, and PPH recorded this as a loan from PPH to Mr Botella, which was covered under a written loan facility agreement between Mr Botella and PPH.

Then Mr Botella presented the promissory note to PPD, as repayment of the $1,315,257.54 in loans to Mr Botella on the accounts of PPD.

Mr Botella argued that the transactions were an internal corporate reorganisation primarily for asset protection purposes due to Australand proceedings brought by subcontractors in relation to alleged defects for plumbing and hydraulic works by PPD and due to legal bills for family court proceedings involving Mr Borella, for which he had to pay from his personal accounts, his redraw facilities, and his business and company accounts.

The Tribunal stated that the taxpayer’s “evidence was confused, sketchy and not coherent as to the stated premise for the corporate reorganisation.

The Tax Benefit

Under this restructure, PPH paid zero tax on the dividend it received and Mr Botella’s loan of $1,315,257.54 was considered repaid, but this did not involve Mr Botella repaying any of the $1,315,257.54 of cash that he received the benefit from.

The Tribunal noted that if, immediately prior to the restructure, PPD had paid a dividend, PPD would have paid Mr Botella a dividend equivalent to the profits held in PPD, and that dividend amount would have been included in Mr Botella’s assessable income for the 2018/19 financial year. But here the dividend was not included in Mr Botella’s assessable income.

The PPD Constitution

Not all of the Division 7A mechanism in the constitution of PPD was replicated in the Tribunal Decision, however the parts described are not dissimilar to typical Division 7A constitution mechanism clauses for off the shelf companies.

The Recitals of the Loan Agreement in the Schedule included: “The Company and the Member have agreed to enter into this Agreement to set out the terms and conditions of every Loan by the Company to the Member” and “the Company and the Member desire that all Loans meet the criteria set out in section 109N of Division 7A … and are therefore not taken to be dividends”.

Clause 19 stated that (bold emphasis added): “[e]very Loan made by the Company to a member is deemed to be made in accordance with the Loan Agreement in Schedule 1 of this Constitution. This Loan Agreement continues to apply if a member ceases to be a member.”

“Loan” was defined in clause 1 of Schedule 1 to have the same meaning as appeared in s 109D of the ITAA 1936 and included, amongst other things, an advance of money.

Schedule 1 stated that “this is the Loan Agreement referred to in clause 19 of the Constitution” and Schedule 1 contained a pro forma setting out the rate of interest payable, maximum term, terms and conditions for every Loan made by the Company to any Member.

The Tribunal’s Finding - Constitution - First Objection Decision Affirmed

Section 109N(1) of Division 7A of the ITAA 1936 requires that

109N Loans meeting criteria for minimum interest rate and maximum term not treated as dividends

Criteria

(1)  A private company that makes a loan to an entity in one of the private company’s years of income is not taken under section 109D to pay a dividend at the end of the year of income because of the loan if, before the lodgment day for the year of income:

(a)  the agreement that the loan was made under is in writing; and

The Tribunal accepted the Commissioner’s view that section 109N(1)’s requirement that the agreement be in writing is not satisfied by an agreement that is partly implied from conduct (i.e. recording in a loans ledger account) and partly in writing (in the Constitution deeming clause and loan agreement Schedule 1).

The Tribunal found the Constitution’s deeming clause itself could not turn the loan advances (occurring by conduct of a loan advance and loans ledger book entry) into a loan agreement made in writing.

The Tribunal found that the essential terms of the agreement, being the specified sum of money and the agreement to repay were “not made under a written agreement but by virtue of advances taking place”.

The Tribunal stated:

the deeming clause operated in relation to advances of money already made. In effect, the deeming clause does not provide that any loan is “made under” a written agreement. This is because the essential terms of the agreement, namely, the agreement whereby PPD agreed to loan Mr Botella a specified sum of money, and Mr Botella agreed to repay that money to PPD was not made under a written agreement but by virtue of advances taking place.

Therefore, the deeming clause cannot turn a “loan” (an advance of money) which occurred by conduct, and which was then recorded as a book entry, into a loan agreement which is made under an agreement that is in writing.

This could be considered in light of the ATO’s Taxation Determination 2008/8 which states at paragraph 35 (bold emphasis added):

All the essential elements of a loan agreement may be in writing even though the actual amount drawn down is not specified in the formal written agreement that sets out the loan terms.

However, there must be some written evidence before the private company’s lodgment day (or at the time of making the loan for the 2003-04 and earlier income years) that a payment or crediting of an amount to the shareholder or associate on a particular date was made under the terms of the formal written agreement.

An example of this is where a formal written loan agreement states that its terms apply to all amounts lent to the shareholder during the income year and those amounts are recorded in the private company’s accounts as loans to the shareholder.

[...]

This ensures that there is not merely an oral agreement, without supporting written material, that the terms in the formal written agreement apply to the amount paid to the shareholder or associate.

The Tribunal referred to Bailey v New South Wales Medical Defence Union Limited (1995) 184 CLR 339 (Bailey), an insurance case, in reinforcing its conclusion by stating that a Constitution could not record a loan agreement between PPD and Mr Botella personally (despite Mr Botella personally being subject as 100% shareholder of PPD outright to the terms of the Constitution of PPD as a contract between PPD and its shareholders - being a direct contract between PPD and Mr Botella personally).

The author notes the quote from Bailey used in the Tribunal Decision at paragraph 83 shown below in the author’s opinion refers to the ability of shareholders to separately contract with the company, and not that the company’s constitution can never give rise to a written agreement between the a shareholder and the company, nor that loan terms cannot be included in the constitution (bold emphasis added):

Whilst the articles of association of a company regulate the relations of members amongst themselves, as members, and with the company, they do not preclude a member from contracting individually with the company upon terms which may or may not be defined by reference to the articles… It will depend on the intention of the parties to the contract namely, the member and the company.

The Tribunal’s Dividend Stripping Decision - Second, Third and Fourth Objection Decisions Affirmed

After canvassing the application of the dividend stripping provisions in section 177 of the ITAA 1936, the Tribunal went through six common indicia of a dividend stripping scheme from Commissioner of Taxation v Consolidated Press Holdings Ltd [1999] FCA 1199 (CPH)

1   A target company (e.g. PPD), with substantial undistributed profits creating a potential tax liability either for the company or its shareholders.

2  The original owner transfers their shares in the target company to a "stripper" entity (e.g. PPH).

3   Once the "stripper" entity owns the target company, the target company pays out its profits as a dividend to that entity.

4   The purchaser escaping Australian income tax on the dividend so declared. The new owner (the stripper) uses tax offsets, credits, or rebates to pay nil tax on the dividend it received.

5   The vendor shareholders receiving a capital sum for their shares in an amount the same as or very close to the dividends paid to the purchasers (there being no capital gains tax at the relevant times), and the original owner gets the value of the profits in a "capital" form (like shares or a loan) instead of "income," paying little to no tax.

6   The scheme being carefully planned, with all the parties acting in concert, without any other commercial purpose for the scheme apart from avoiding tax on the dividend.

The Tribunal found that all six indicia were satisfied. Mr Botella unsuccessfully raised various arguments against the six indicia, and all of which failed. The Tribunal stated at paragraphs 75 and 76:

there were significant gaps and shortcomings in the evidence about the “asserted asset protection strategy” which Mr Botella claimed was the commercial purpose of the transactions in September 2018, besides him also obtaining access to funds on more generous terms.

Furthermore, there was no probative nor contemporaneous evidence in relation to the advice that was supposedly furnished by Mr Cassaniti [(his financial adviser)] and by Mr Rowntree [(the lawyer who suggested interposing PPH between Mr Botella and PPD)], notwithstanding the corporate reorganisation that was undertaken in September 2018 was implemented in accordance with their advice. Mr Botella could not recall the existence of any written advice provided by them…

The Tribunal Decision

The Tribunal noted that neither Mr Botella nor the ATO Commissioner canvassed Merchant v Commissioner of Taxation which would cover dividend stripping provisions as Merchant is currently on appeal to the High Court, judgment reserved.

The Tribunal affirmed the First, Second, Third and Fourth Objection decisions all in favour of the Commissioner with some additional elements covered in relation to a payroll tax liability and additional superannuation tax liability of the taxpayer not referenced in detail in this article.