Are loans from private companies legal?
Subject to its constitution, a private company is perfectly entitled to make a loan to whomever it likes. Advancing a loan doesn’t give rise to a taxation event but for the operation of Division 7A. So, it’s a tax issue. Without Division 7A, no-one would ever pay themselves a wage from a private company!
What is the impact of Division 7A?
Division 7A requires that the loan is:
- Properly documented
- Repaid with interest at least equivalent to the published ‘benchmark rates’
- Repaid within the maximum loan period
Benchmark interest rate
Maximum loan period
*To qualify for the 25 year maximum loan period, 100% of the loan must be secured by a registered mortgage over real property and at the time the loan is made, the market value of the property less the amount of any other liability secured over the property in priority to the loan must be at least 110% of the amount of the loan.
Failure to comply with Division 7A can result in a deemed dividend equivalent to the lesser of the amount of the loan or the amount of the distributable surplus. Deemed dividends are unfranked dividends.
TIPS FROM THE TEAM
- Loans from a private company to shareholders or their associates can have severe tax consequences under ‘Division 7A’ if not handled properly.
- Make sure you make your minimum repayments before 30 June.
- Loans can take many forms and sometimes exist without you even realising it! For example, in addition to a loan in the traditional sense, whenever a private company pays for your personal expenses such as school fees, your tax bill or your holiday, it is potentially making a loan.
- Keeping your tax and accounting affairs up to date is vital to identifying a potential Division 7A issue within time limits. When we prepare your annual financial statements, BridgePoint Group will notify you if you have a potential Division 7A issue. However, time limits apply to get your affairs in order.
FOR MORE ABOUT LOANS FROM PRIVATE COMPANIES OR A COMPLIANT DIVISION 7A LOAN AGREEMENT, PLEASE CONTACT OUR LEGAL TEAM ON 1300 656 141