Loan Agreement Template
Division 7A Loan Agreement + Free Sample 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 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.
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.
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.
Company Resolution accepting Division 7A
Draft minutes of a meeting of the board of a company agreeing to make a loan to a shareholder. Includes:
- Resolution to make loan
Resolution of a company to make a loan to its shareholders/ directors in accordance with Division 7A loan agreement. 1 page
Division 7A Loan Agreement can be used when a company makes a loan: to a shareholder or shareholders of the company; or. to an associate of a shareholder of the company.
More information from ATO.GOV
A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A even if the participants treat it as some other form of transaction such as a loan, advance, gift or writing off a debt.
Division 7A can also apply when a private company provides a payment or benefit to a shareholder or associate through another entity, or if a trust has allocated income to a private company but has not actually paid it, and the trust has provided a payment or benefit to the company’s shareholder or their associate.
Division 7A is part of the Income Tax Assessment Act 1936 and is intended to prevent profits or assets being provided to shareholders or their associates tax free.
A Division 7A deemed dividend is generally unfranked. Given this, the most effective way to provide a payment or other benefit to a shareholder or their associate is to pay it as a normal dividend (with a franking credit if available) and for the shareholder to include it in their assessable income.
Division 7A doesn’t apply to amounts that are assessable to the shareholder or their associate under other parts of the income tax law, such as normal dividends or director’s fees.
A payment or benefit that is potentially subject to Division 7A isn’t treated as a dividend if it’s repaid or converted into a Division 7A complying loan by the company’s lodgment day for the income year in which the payment or benefit occurs.