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Div 7A Loan Agreement

Division 7A of the Income Tax Assessment Act is a mechanism used to ensure that tax free payments are not made to directors, shareholders or associated entities by way of loans that are left outstanding or later written off.

division 7a company loans
All companies wishing to avoid tax penalty under Division 7A are strongly advised to implement loan agreements for eligible transactions before lending to associates.

This is achieved by treating certain types of payments as dividends paid by the company. The dividend payments are a form of assessable income.

The following types of payments fall under Division 7A:-

  • Payments by a company to a shareholder or shareholder’s associate;
  • Payments lent by the company to a shareholder or shareholder’s associate;
  • Debts owed by a shareholder or shareholder’s associate to the company that are forgiven.
  • Some loans will not fall under the Division 7A provisions. For example, intercompany loans are excluded from Division 7A.

To discern whether or not a particular payment is considered under Division 7A, ask yourself the following:

  • Other than a company, has a payment been made to an affiliated entity?
  • Has the payment been made due to the influence of the shareholder/recipient?

If the answer is yes to both of the above questions the payment is probably subject to 7A provisions. Seek further professional advice if you are still unsure of the condition of the payment.

All companies wishing to avoid tax penalty under Division 7A are strongly advised to implement loan agreements for eligible transactions before lending to associates.

Deemed dividend provisions will not apply where a loan agreement is in place between the company and the entity receiving the payment from the company. The following is a brief outline of some of the conditions that must be met:-

  • The loan must be reduced to writing in the form of a written agreement and made before the lodgement date;
  • The rate of interest is equal to or above the Indicator Lending Rates – Bank variable housing loans interest rate last published by the RBA before the start of the lending entities income year;
  • The term does not exceed the maximum term of either 25 years where 100% of the loan is secured by a registered mortgage over property or otherwise, 7 years.

The associate must pay the minimum yearly repayment each year, or the amount will be classed as a dividend in the income year in which the minimum yearly repayment was not made.

Your Division 7A Loan Agreement should include the full names of the parties, the terms of the loan such as the loan amount, the date the loan is drawn down, the repayment terms, repayment dates, interest payable and the date the agreement was made.

The Agreement does not need to be approved by the ATO, although it will need to satisfy all of the requirements of the Income Tax Assessment Act.

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