Resolution with Division 7A
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Resolution with Division 7A agreement
Division 7A Loan Agreement
A Resolution with Division 7A Loan Agreement is a Company Resolution of draft minutes of a meeting of the board of a company agreeing to make a loan to a shareholder. This Company Resolution Includes:
- Resolution to make loan
A Resolution of a company to make a loan to its shareholders/ directors in accordance with Division 7A loan agreement.
A Division 7A dividend in the Australian tax system is an amount treated by the Australian Tax Office (ATO) as an assessable dividend of a shareholder of a private company that attempts to make a tax-free distributions of profits to the shareholder, or an associate of the shareholder.
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Division 7A loan agreements
Loans to Shareholders: Division 7A loan agreements
Borrowing money from a private company can have serious pitfalls if not done correctly. Directors and shareholders of private companies 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’ or deems them to be dividends, and taxes them accordingly. The rules are stringent and require a special type of loan agreement know 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
- the names of the parties;
- the loan terms:
- the amount of the loan and the date the loan amount is drawn,
- the requirement to repay the loan amount,
- the period of the loan and,
- the interest
- that the parties named have agreed to the terms; and
- when the written agreement was made, ( the date it was signed )
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.
Loans under division 7A can be either secured or unsecured. If unsecured, the maximum term can be
Loans can have a maximum term of 25 years provided they are:
- Secured by registered mortgage
- The property value is at least 110% of the property value.
Both these criteria must be satisfied.