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Estimated Time to Build: 4 - 6 Minutes
Jurisdiction: Australia Wide, NonWA
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Download the Debt Recognition (including pre-Div 7A Loans) Sample
This is the person that lent you money. If this is to refresh a Division 7A loan then this is your company that lent you money before 4 December 1997.
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HOW DOES SECTION 108 WORK?
For section 108 to operate, the Commissioner had to be of the opinion that the amount lent or paid pre 1997 represented a distribution of profits.
It was always a difficult job for the Commissioner to prove that the loan or advance was in substance a profit distribution. The ATO conducted a project focusing on compliance with section 108 and section 18 of the Fringe Benefits Tax Assessment Act 1986 (Cwth). It was found that a large number of companies were making low or no interest loans to it shareholders and their associates. In other words the company lent the money, interest free, and it wasn't paid back.
The Commissioner was of the view that section 108 was being continuously abused.
To justify that the payment represents a distribution of profits, the Commissioner has to demonstrate that the parties did not intend that the “loan” be repaid. It is very difficult for the Commissioner to prove what the taxpayer was thinking.
Ultimately, to get rid of this “mind reader” obligation, the government introduced Division 7A into the Tax Act. Division 7A came into effect on 4 December 1997. Division 7A requires that you have a written loan agreement and pay a minimum set interest rate to your company each year. All very expensive and cumbersome on the taxpayer- just the way the Commissioner likes it!
Division 7A only applies to loans made after 4 December 1997.
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WHY DO I STILL HAVE TO WORRY ABOUT SECTION 108?
Section 108 continues to apply to loans made before 4 December 1997. The threat of section 108 always hovers over all pre 4 December 1997 loans made by your company to you and your “associates”.
Loans made before 4 December 1997 either comply with section 108 or they don't. At worst:
1. the loans will inadvertently fall foul of section 108 and be deemed dividends; or
2. the loans are “freshened” up so that that the Commissioner now deems them to be new loans and subject to the rules contained in “Division 7A”.
People with pre-1997 loans therefore walk a narrow path. It is important to keep your loan a “complying section 108” loan at all times. However, this is difficult.
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You show that the Loan is still active by doing a “Statement of Recognition” each year. It states that the Borrower still owes the money and that the company agrees. The Statement of Recognition is unambiguous in what it states.
A Statement of Recognition becomes effective by:
1.1 The shareholder or shareholder’s associate (Borrower) in writing to the private company (Lender) makes a statement (Statement of Recognition) to confirm that the debt is still outstanding;
1.2 delivering it to the company; and
1.3 the company signing the statement acknowledging that the debt is still outstanding and enforceable.
The new limitation period effectively starts to accrue from the date of this acknowledgement.
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ANY STATE DUTY?
We prepare the Statement of Recognition so that they are not subject to duty. They are not dutiable instruments.
Why is there is no duty?
This Statement of Recognition is not in itself an agreement to pay. Rather it is merely an acknowledgement of indebtedness. Therefore, the Statement of Recognition is not a dutiable instrument and does not require stamping.
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Traditionally you don't put in the loan amounts in the "Statement of Recognition" (or a Division 7A loan agreement for that matter). This is because:
1. The loan amounts and description of the loans with all their terms (if any) are not legally required to be put in the body of the Statement of Recognition in order to have a fully operational acknowledgment the debt. It is better and clearer to identify the debts by referencing the debts to the companies’ books. The companies’ books already adequately record this information.
2. It is safer not to put in the debt amounts into the body of the Statement of Recognition in case, one day one of old debts does change. Also, there is an added burden of seeking to describe the debts. I.e. you would need to define the debt as to a date and any other distinguishing terms – such as whether interest was agreed back when the loan was made.
3. It is safer not to put in an amount in case the amount was wrong or the client forgot about one of the loans that only appears when the ATO does an audit – from the companies’ books
4. By not mentioning the debt figure, the client is able to use the Statement of Recognition each year without needing to purchase another one from www.lawcentral.com.au.
4. The safer course of action is to say that all the pre 1997 loans are acknowledged as appear in the books of the company from time to time. The debts have to be clearly identified for the Statement of Recognition and this has already been achieved in the companies’ books.
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These are some technical comments for accountants, lawyers and financial advisers.
Don't the old Section 108 company loans (pre-4 December 1997) now come under Div 7A? Don't they get caught under the amalgamated loan provisions in proposed section 109E? (The 109E seeks to catch prior year loans which do not meet Div 7A repayment criteria.)
The answer is no. Your old section 108 loans battle on. Section 109E doesn’t affect them. They do need however a Statement of Recognition to protect them. Statement of Recognitions cost $33 from www.lawcentral.com.au/&&&&&&
Div 7A follows section 109 in the ITAA 1936. Section 108 still exists. Section 108 continues to hover over your pre-4 December 1997 company distributions waiting to catch you out.
What is section 109E intended to do? It just catches post 4 December 1997 loans.
Read the proposed s 109E(3). It defines the term "amalgamated loan" and Item 7 of Sch 9 of Taxation Laws Amendment Bill (No 7) 1997.
Proposed s 109E provides that "a private company is taken to make a loan (an amalgamated loan) ... if the private company makes one or more loans (constituent loans) to the entity during the year ..." and "the amount of the amalgamated loan is the sum of the amounts of constituent loans that have not been repaid at the end of the year of income in which the amalgamated loan is made".
Item 7 of Sch 9 of Taxation Laws Amendment Bill (No 7) 1997 provides that the amendments apply to "loans and payments made on or after 4 December 1997 (the introduction day) ... and debts forgiven on or after the introduction day (regardless of when the debts arose)".
You have to read Item 7 literally (Cooper Brookes (Wollongong) Pty Ltd v FCT (1981) 147 CLR 297). It limits the application of Div 7A to all loans made on or after 4 December 1997.
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Yes this will freshen up all loan agreements.
The limitation period runs again if you confirm the loan.
What happens if the limitation period expires? Firstly, it may not have expired. You may have confirmed the loan. If you have, then the limitation period starts again.
The limitation period starts all over again: section 54 of the Limitation Act (NSW).
How could you have freshened up the loan? You, as the borrower, confirm the loan by:
(a) acknowledging to the lender, in writing, signed by you, the right or title of the company to the cause of action (this what you are also doing here by building this document); or
(b) makes to the lender a payment in respect of the loan (but this can have unintended side effects, and who wants to pay back the loan, at the moment, anyway?)
But what is the limitation period has really expired?
Thankfully in Queensland, South Australia, Tasmania, Victoria and Western Australia the limitation period can be extended by this document you are currently building even after the limitation period has expired. Sadly in NSW the limitation period can not be extended after the limitation period has expired.
However, don't take the risk. Build this document right now to be safe and keep it in your Company Secretary file.
This hint is provided by Law Central Legal.
What happens if the limitation period expires?
Firstly, it may not have expired. You may have confirmed the loan. If you have, then the limitation period starts again.
The limitation period starts all over again: section 54 of the Limitation Act (NSW).
How could you have freshened up the loan? You, as the borrower, confirm the loan by:
(a) acknowledging to the lender, in writing, signed by you, the right or title of the company to the cause of action (this what you are also doing here by building this document); or
(b) makes to the lender a payment in respect of the loan (but this can have unintended side effects, and who wants to pay back the loan, at the moment, anyway?)
But what is the limitation period has really expired?
Thankfully in Queensland, South Australia, Tasmania, Victoria and Western Australia the limitation period can be extended by this document you are currently building even after the limitation period has expired. Sadly in NSW the limitation period can not be extended after the limitation period has expired.
However, don't take the risk. Build this document right now to be safe and keep it in your Company Secretary file.
This hint is provided by Law Central Legal.
You have to do one for each person that owes the company money before 1997.
E.g. If dad, mum and son borrowed money from the company pre-1997, then you need to do dad's, mum's, and son's Statement of Recognition separately.
They are good value as you can use them each year to refresh your old section 108 loan.
This hint is provided by Law Central Legal.
Your company loaned you money before 1997. The Company is therefore the Lender.
Your son borrows some money from the Company. Your son is therefore the Borrower.
The Lender has the money and lends the money to the Borrower.
The Borrower is the person that borrows the money from the Company.
This hint is provided by Law Central Legal.
If the Borrower is a Family Trust then put it in like this:
First Name Colin Smith and Joanne Smith
Middle Name
Last Name as trustee of the Smith Family Trust
This hint is provided by Law Central Legal.
Your company loaned you money pre-1997. The Company is therefore the Lender.
Your son borrows some money from the Company. Your son is therefore the Borrower.
The Lender has the money and lends the money to the Borrower.
The Borrower is the person that borrows the money from the Company.
This hint is provided by Law Central Legal.
The Borrower borrows money from the Company. You put the Borrower's address on this page.
You can put in either the Borrower's postal, home or office address.
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This document has been prepared by the law practice Law Central Legal
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