Company Loans
The ability to manage a family business or a families investment portfolio is significantly impacted by how a family in business can extract money from a company. The area of tax law governing private company loans (referred to in the tax legislation as “Division 7a”) creates tax opportunities and also can equally create tax controversy when not managed with care and knowledge.
At its simplest level tax law (Division 7a) requires that if you borrow money from a company you have to pay it back – with interest. And that simple concept has created a multitude of problems.
For discretionary trusts Westcourt have been knowledge in current tax reforms impacting how trust profits are payable to companies that enjoy the trust profits but have not yet received the cash (“UPE’s”).
At Westcourt we have expertise in the application and operation of Division 7a. With experience ranging back to its precursor provisions (“section 108”) and through multiple stages of reform from 1997, 2004, 2005, 2007, 2010 and to the numerous range of ATO Tax Rulings of Division 7a (many of which lap over each other) we have the technical knowledge to cut through history and complexity and create a solution that works for your family and the family objectives with both investments and succession.
The operation of many strategies for Division 7a is also practically difficult to apply correctly. With trust profits that have not yet been paid (“UPE’s”) sitting in sub-trust, option 1 agreements, option 2 agreement or s109N loans – we understand that the tax strategy can often fail because the tax implementation and documentation of the strategy is simply lacking. So we back that vigour up not only with technical tax excellence within the firm but also through technology and a precedent database as a CCH Gold Partner and using the templates and checklist strength from BusinessFitness to simplify and automate much of the difficult Division 7a tax laws that apply to these structures.
And while these different items sound confusing we focus on cashflow forecasting the tax cost of each – together with the expected accounting and advice fees for each option.
We also model different approaches to managing Division 7a loans. A typically example was with a client recently when we highlighted the higher cost of interest they were required to pay under the ATO mandated loan agreement. Our client then refinanced their internal loan with a bank loan at a much lower interest rate, and reduced their overall tax liability by eliminating the Division 7a loan altogether.
Another instance is structuring employee loans to buy shares prior to the employee becoming a shareholder – such that the loan is governed by the fringe benefits tax laws as compared to the tax law governing Division 7a.
As a practice which has only one focus – families in business – and with proven technical excellence and proven senior tax leadership we are ideally placed to help smart families properly comply with this area of problematic law and also take advantage of how the Division 7a laws can help your family enjoy the tax and investment opportunities that are legitimately available.
Frequently Asked Questions
A Division 7A loan agreement is a type of loan agreement that is governed by Division 7A of the Income Tax Assessment Act 1936 (Cth). Division 7A is a tax rule in Australia that applies to loans made by private companies to their shareholders or their associates.
Under Division 7A, if a private company makes a loan to a shareholder or an associate, the loan is treated as a dividend for tax purposes unless it is structured in accordance with the requirements of Division 7A. This means that the loan must be subject to a Division 7A loan agreement that sets out the terms and conditions of the loan, including the interest rate, the repayment schedule, and the security arrangements.
The purpose of Division 7A is to ensure that private companies do not avoid paying tax by making loans to their shareholders or associates instead of paying dividends. Division 7A loan agreements are used to ensure that the loan is structured in a way that complies with the tax laws and that the loan is treated as a loan for tax purposes, rather than as a dividend.
It’s important to understand that Division 7A is a complex area of tax law, and it’s a good idea to seek advice from a tax professional if you are considering making a loan to a shareholder or an associate. A tax professional can help you understand your obligations under Division 7A and ensure that your loan is structured in a way that complies with the tax laws.
Division 7A of the Income Tax Assessment Act 1936 (Cth) is a tax rule in Australia that applies to loans made by private companies to their shareholders or their associates. Division 7A is designed to prevent private companies from avoiding tax by making loans to their shareholders or associates instead of paying dividends.
If you are a shareholder or an associate of a private company, you can avoid the application of Division 7A by ensuring that any loans from the company are structured in accordance with the tax laws. Some of the ways to avoid Division 7A include:
Repaying the loan: Repaying the loan in accordance with the terms of the loan agreement will avoid the application of Division 7A.
Structuring the loan as a bona fide commercial loan: If the loan is structured as a bona fide commercial loan, with an interest rate that is at or above the benchmark interest rate set by the Australian Taxation Office (ATO), it may not be subject to Division 7A.
Seeking professional advice: Seeking advice from a tax professional or a tax lawyer can help you understand your obligations under Division 7A and ensure that the loan is structured in a way that complies with the tax laws.
It’s important to understand that Division 7A is a complex area of tax law, and it’s a good idea to seek advice from a tax professional if you are considering making a loan to a shareholder or an associate. A tax professional can help you understand your obligations under Division 7A and ensure that your loan is structured in a way that complies with the tax laws.
The length of a Division 7A loan is a matter that is determined by the terms of the loan agreement. There is no specific time frame for a Division 7A loan specified under the tax laws.
However, the Australian Taxation Office (ATO) has issued guidelines on the terms and conditions of Division 7A loans, which include the requirement that the loan be structured as a genuine commercial loan, with terms and conditions that are consistent with a loan made between unrelated parties.
This means that the loan should have a clear repayment schedule, an interest rate that is at or above the benchmark interest rate set by the ATO, and security arrangements that are consistent with a loan made between unrelated parties.
It’s important to understand that Division 7A is a complex area of tax law, and it’s a good idea to seek advice from a tax professional like Westcourt if you are considering making a loan to a shareholder or an associate. A tax professional can help you understand your obligations under Division 7A and ensure that your loan is structured in a way that complies with the tax laws.
