With 30 June approaching, it is important to review the company books to see if there are any “loans” to shareholders or their associates that have been made during the income year.  Division 7A of the Income Tax Assessment Act 1936 (Cth) (“Division 7A”) operates to deem loans made to private company shareholders or their associates to be dividends unless certain conditions are met.

For the purposes of Division 7A, “loan” has an extended meaning.  In addition to including ordinary loans, a “loan” includes the provision of credit or any other form of financial accommodation, as well as any transaction that in substance effects a loan of money.

What is a Division 7A loan agreement?

A Division 7A loan agreement is an agreement which makes the loan compliant with Division 7A, so it will not be deemed to be a dividend.  Division 7A loan agreements must comply with the terms of Division 7A itself, as well as the Commissioner of Taxation's Rulings and Determinations, in order to be effective.

What arrangements can I use a Division 7A loan agreement for?

Division 7A loan agreements can be used where private companies make loans to shareholders or associates, where those loans would otherwise be deemed to be dividends.

The term of a Division 7A loan agreement is limited to 7 years, unless it is secured with property, in which case it can be for a term of up to 25 years (provided that the market value of the property used to secure the loan is at least 110% of the loan amount).

Division 7A loan agreements are not required for:

• loans made in the ordinary course of business on ordinary commercial terms;
• loans to shareholders to acquire shares in the company under an employee share scheme;
• payments made by a company to another company, other than a company in the capacity of a trustee; and
• distributions made by liquidators in the course of winding the company up.

What is required?

You need to complete a new Division 7A loan agreement for each year in which you borrow funds from the company.  These agreements must:

• be wholly in writing.  Partly written and partly oral agreements are not acceptable;
• have a rate of interest that equals or exceeds the “benchmark interest rate”;
• have a term that does not exceed 7 years (or 25 years for secured loans);
• accurately record the terms of the loan (which includes recording the names of the parties, the amount of the loan, the date on which it is drawn, the requirement to repay the loan amount, the period of the loan and the interest rate payable, the fact that the parties have agreed to the terms and the date on which the agreement was made)

In addition, minimum repayments must be made each year.

What if I fail to prepare the Division 7A loan agreement?

There are significant tax consequences for breaches of Division 7A. Gold and Platinum members read on to find out how deep the taxman reaches into your pockets for non-compliance.

Possible Reform? Gold and Platinum members read on…..

What about distributions from trusts?

Unpaid trust distributions can also attract Division 7A.  Look out in our next bulletin for more information on Unpaid Present Entitlements (known as “UPEs”) and Division 7A.

Law Central has made dealing with Division 7A easy for you by providing a Division 7A Loan Agreement available for you to use online.