Division 7A Loan Agreement
This agreement includes documents regarding borrowing money from a private company which can have serious pitfalls if not done correctly. Directors and shareholders often borrow money from their companies. Care must be taken so that the Australian Taxation Office does not deem these loans to be dividends.
Division 7A of the Income Tax Assessment Act 1936 (‘the Act’) requires such loans to be ‘arm’s length’. The rules are stringent and require a special type of loan agreement known as a Division 7A loan agreement.
The Act is aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates) in the form of loans. Unless the loan comes within specified exclusions in Division 7A it is treated as an assessable dividend and taxed as a dividend. The Division 7A loan agreement enables you to satisfy these requirements so that your loan is legitimate in the eyes of the ATO.
This bundle includes:
Division 7A Loan Agreement Template
Agreement from company to shareholders that satisfies requirements of a loan under Division 7A of the income Tax Assessment Act 1936. Includes:
- Yearly repayments
- Statutory minimum repayments
- Payments affected by the Act
- Early repayment
Agreement is Suitable for secured and unsecured loans. Most of the variables are in a Schedule to the agreement for ease of drafting.
12 pages long.
A loan calculator that enables you to calculate the repayments and a repayment schedule for the loan. Simply enter the loan amount, interest rate, term, commencement date and our loan amortisation will calculate monthly repayment AND give you a schedule of all repayments over the life of the loan including the due dates!
A concise explanation of the law with links to legislation and ATO rulings. Everything you need to know in a couple of pages you can print our or send to your accountant.
In order for your loan to be effective it must be accepted by the company. To help you do this we have included a precedent for the appropriate company resolution. Simply put in your company and loan particulars and you are ready to go.
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Borrowing money from a private company can have serious pitfalls if not done correctly. Directors and shareholders often borrow money from their companies. Care must be taken so that the ATO does not deem these loans to be dividends, and tax them accordingly.
Division 7A of the Income Tax Assessment Act 1936 requires such loans to be ‘arm’s length’. The rules are stringent and require a special type of loan agreement known as a Division 7A loan agreement.
Division 7A of the Income Tax Assessment Act 1936 is aimed at preventing private companies from making tax-free distributions of profits to shareholders (or their associates) in the form of loans. Unless the loan comes within specified exclusions in Division 7A it is treated as an assessable dividend and taxed as a dividend.
The ATO has confirmed in final determination TD 2008/8 the formal requirements for a complying loan agreement for the purposes of Div. 7A. Such loan agreements must be in writing and be agreed by the company and its borrower. It is now essential that each Div 7A loan agreement accurately records the loan terms in accordance with the ATO determination. It is not acceptable to rely on parts of the company’s constitution that may provide rules for such loans.
TD 2008/8 requires that the entire agreement between the parties must be in writing including:
1) the names of the parties;
a) the amount of the loan and the date the loan amount is drawn;
For the purposes of the Act, an agreement that is partly oral and partly in writing is not an agreement in writing. The author recommends that, in all cases, a formal loan agreement be prepared and signed by the company and the borrower to ensure that each Div 7A loan complies with the ATO’s requirements.