Keywords: div7a, division 7a loan agreement, preventing deemed dividend
Division 7A
Division 7A of the Income Tax Assessment Act 1936 (Cth) ('ITAA 1936') treats the following three kinds of amounts as dividends paid by a private company:
- amounts paid by the company to a shareholder or shareholder's associate;
- amounts lent by the company to a shareholder or shareholder's associate;
- amounts of debts owed by a shareholder or shareholder's associate to the company that the company forgives.
This treatment means that the amounts forms part of the shareholder or associate's assessable income.
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Note An amount can also be included as a shareholder or shareholder associate's assessable income if a company has an unpaid present entitlement to income of a trust and the trustee makes a payment or loan to, or forgives a debt of, the shareholder or associate. |
S 109D defines "loan" broadly as:
- an advance of money;
- a provision of credit or any other form of financial accommodation;
- a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount;
- a transaction which in substance effects a loan of money.
Preventing a Deemed Dividend situation
Parties can prevent a deemed dividend from arising (where a payment or loan is caught by Div7A) by:
a) making a genuine, full repayment (see s 109R ITAA 1936); or
b) making the private company loan (or converted payment) on a commercial footing, in accordance with s 109N of the ITAA 1936 (i.e. a "Div-7A compliant loan")
at a date before the company's lodgment day for the income year in which the loan or payment is made.
If neither of the actions above are taken, the amount of the deemed dividend will be based on the unpaid amount of the loan as at the day before the lodgment day (subject to s 109Y ITAA 1936).
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Note "Lodgment day" is defined in s 109D(6) ITAA 1936 as the earlier of: the due date for lodging the company's tax return for the income year in which the loan or payment is made; and the company's actual lodgment date. |
Div-7A Compliant Loan
A loan from a private company to a shareholder or shareholder's associate is not treated as a deemed dividend at the end of the year in which the loan is made if, before the lodgment day for the year, the following requirements are met:
- the loan agreement is in writing;
- the interest rate payable on the loan for income years after the year in which the loan is made equals or exceeds the benchmark interest rate for the year (i.e. the Indicator Lending Rates published by the RBA before the start of the year of income);
- the term of the loan does not exceed the maximum term for that kind of loan (i.e. 25-years secured by a registered mortgage over real property that has been registered in accordance with State or Territory law, and the market value of that real property (less the amounts of any other liabilities secured over that property in priority of the loan) is at least 110% of the amount of the loan OR 7 years for any other loan).
Once a loan is made on a commercial footing in accordance with the above, it becomes subject to s 109E (the amalgamated loan rules).
What is an "amalgamated loan"?
An amalgamated loan is where a private company makes one or more loans to a single entity during a year of income, each of which:
- has not been fully repaid before the company's lodgment day for the income year in which the loan was made;
- would give rise to a deemed dividend under s 109D ITAA 1936, if it was not for s 109N; and
- has the same maximum term (i.e. each constituent loan must have the same maximum term so if a private company makes both a secured and unsecured compliant loan to the same entity within an income year this gives rise to 2 amalgamated loans).
The amount of an amalgamated loan is the sum of the constituent loan amounts that have not been repaid before the lodgment day for the year of income in which the amalgamated loan is made.
With an amalgamated loan, there is a minimum yearly repayment that will need to be made in order to avoid the operation of Div 7A. The formula for this minimum yearly repayment is found in s 109E(6) ITAA 1936. A deemed dividend arises for each income year in which the minimum yearly repayment is not properly made.
The NowInfinity service
On our platform, we provide the following:
- The Division 7A Loan Agreement
- The Drawdown Acknowledgment for Div 7A Loan
Here is a checklist for the information required in filling out the form: Division 7A Loan Agreement: Ordering checklist
Further Information
Where can I enter the loan amount and date when completing a Div 7A loan agreement?
How to set up Division 7A loan on NowInfinity
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Division 7A Agreements can be complex and relevant professional advice should be sought.