Division 7A loan from a company
A loan from a private company to a shareholder or an associate of a shareholder may be deemed to be a dividend unless certain requirements are met. Without a compliant loan facility agreement, the loan may become assessable income for the shareholder. In other words, the shareholder will need to pay tax on that amount.
Division 7A of the Income Tax Assessment Act 1936 (Cth) contains anti-avoidance provisions that are aimed at preventing private company shareholders from avoiding dividend taxation by accessing company profits in another form, for example, by way of a loan.
For a person to be a ‘shareholder’ of a company, that person needs to be entered on the register of shareholders. The word ‘associate’ has a broad definition and it includes relatives, partners, trustee of a trust and a company.
The most significant exception to the operation of Income Tax Assessment Act 1936 (Cth)is where the loan is made subject to a written agreement that complies with the criteria set out in section 109N of the Income Tax Assessment Act 1936 (Cth).
Criteria of Income Tax Assessment Act 1936 (Cth)
The criteria are technical and extensive therefore it is prudent for you to seek a lawyer to assist you with drafting this document.
The written agreement must provide:
– that the interest rate payable for an income year subsequent to the income year in which the loan was made is at least equal to the benchmark interest rate for that year. The ATO publishes the benchmark interest rates for income years from and including the 1998–99 income year.
– that the maximum term of the loan is 25 years if the loan is a secured loan or 7 years if the loan is not secured.
– the name of the parties, being the company and the company’s shareholder or associate of the shareholder.
– the loan terms including the amount of the loan, the date the loan amount is drawn, the requirement to repay the loan amount, the period of the loan and the interest rate payable.
– minimum yearly repayment. Failure to make the required minimum repayment of the amalgamated loan in a later year will trigger a deemed Div 7A dividend to the extent of the deficiency.
For a loan to be secured:
– 100% of the value of the loan must be secured by a registered mortgage over real property; and
– when the loan is first made, the market value of that real property (less the amounts of any other liabilities secured over that property in priority to the loan) must be at least 110% of the amount of the loan
How we can help
There are material tax consequences when money is lent from a company to a shareholder. A generic loan agreement will not be satisfactory. Our commercial law team at Legal Point Lawyers can assist you with drafting a loan facility agreement that complies with Division 7A of Income Tax Assessment Act 1936 (Cth).
By clicking on the button below, you can access our fully-featured document that satisfies all the requirement in Division 7A of Income Tax Assessment Act 1936 (Cth).Division 7A Loan
This publication provides general information of an introductory nature and is not intended and should not be relied upon as a substitute for legal or other professional advice. While every care has been taken in the production of this publication, no legal responsibility or liability is accepted, warranted, or implied by the authors or our firm, and any liability is hereby expressly disclaimed.
Ge Wu is the solicitor director of Legal Point Lawyers & Attorneys. He has been admitted to practise law since 2005. Throughout his practice, Ge Wu predominantly practises in the areas of Property Law, Immigration Law, Commercial Law, Civil Litigation and Family Law.
His experience covers all aspects of property law, commercial/retail lease, immigration law and civil litigation, while at the same time, he also has experience in family law, criminal law and other areas such as will-drafting and general advice.
He has frequently been instructed by corporate clients in pre-acquisition due diligence reports, structuring property development, land/shopping centre acquisitions, G.S.T. and stamp duty advice for buying/selling businesses, as well as share transfers and company re-structures.
Ge Wu has been appointed as Notary Public since 2011 and started to provide Notary Public service to clients from different cultural backgrounds.