Under Div 7A of the ITAA 1936, certain amounts paid, lent or forgiven by a private company to shareholders or their associates may be treated as being a deemed dividend for tax purposes, subject to some exclusions. However, the Commissioner has a discretion to disregard this outcome if the deemed dividend arises as a result of an honest mistake or inadvertent omission.
When deciding whether or not to exercise the discretion, the ATO says one of the factors it considers is the extent to which corrective action has been taken and, if so, how quickly that action was taken. It says corrective action usually involves entering into a complying loan agreement and making catch-up payments of interest and capital.
The interest amount is compounded, as it represents the capitalisation of missed interest payments in the earlier years.