Division 7A Loans refer to post 4 December 1997 transactions that are treated as dividends made by a private company to, on behalf of, or for the benefit of, a shareholder or associate for the purposes of the Income Tax Assessment Act 1936. The transactions that are caught under the provisions of the Act are those payments, loans or transfers of property made by a company to a shareholder or associate, as well as debts forgiven by the company in relation to it’s shareholder/s or associate/s, that are not otherwise excluded by the Act.
Of course, as dividends can be taxed the application of Division 7A can have significant unintended consequences for those who operate their small business under a private company structure.
One type of transaction specifically excluded from Division 7A is a loan made by a company to its shareholder or associate pursuant to a written loan agreement, which provides for interest to be paid on the loan at the benchmark interest rate. The interest rate fluctuates yearly and the loan agreements themselves can be for a period of up to 7 years for an unsecured loan, or up to 25 years for secured loans. Loan terms can be extended to the maximum 25 year period, but doing so may cause the loan to be considered as a new loan for the purposes of the Act, and therefore caution may need to be exercised.
Changes to the Act which were initially foreshadowed in the 2016-17 Budget designed to make it easier to correct for inadvertent breaches of Division 7A and to create certainty with simplified Division 7A loan arrangements are still yet to come into effect.
