If you have a private company and it has made a loan to a shareholder or an associate of a shareholder, don’t forget your obligations to either repay the loan in full or make a minimum yearly repayment under a Division 7A Loan Agreement.
Let’s say that you, as a shareholder in a private company or an associate of a shareholder, borrowed from the private company during the year ended 30 June 2024. You can tell whether such a borrowing exists by examining the company’s balance sheet as at 30 June 2024. The loan should be shown as an asset of the company; you may also see such loans as negative liabilities, however showing the loan as an asset is the better way.
Drawings are treated as Division 7A loans
Drawings from your company are treated as loans to the person taking the drawings. If these drawings exceed the amounts otherwise owed to the drawer as at 30 June, a loan exists, and action must be taken to avoid a deemed dividend arising.
Under tax law, if the loan is not fully repaid by the due date for lodgement of the company’s tax return, or the actual date of lodgement (whichever is earlier), the loan will be treated as an unfranked dividend to the borrower for the year ended 30 June 2024.
Preventing a deemed dividend with Division 7A Loan Agreement
Alternatively, you can enter into a Division 7A Loan Agreement to prevent a deemed dividend. Under this agreement, the loan must be repaid on a principal and interest basis over a maximum of 7 years. If secured by a mortgage over real property (and other conditions are met), the loan can be repaid over 25 years.
Interest charged under a Division 7A Loan Agreement must be at least the ATO’s benchmark interest rate, which is updated annually. For the year ending 30 June 2025, the rate is 8.77%.
What is a minimum yearly repayment?
Once a loan is under a Division 7A Loan Agreement, the borrower must make a minimum yearly repayment by 30 June each year. If the full repayment is not made on time, the unpaid portion is treated as a deemed unfranked dividend.
Example of minimum yearly repayments
Great Calculations Pty Ltd lent $50,000 to one of its shareholders, Petra, on 9 May 2022. Petra couldn’t repay the loan by the tax return lodgement date. As a result, she entered into a Division 7A Loan Agreement for 7 years. She is required to make the following minimum yearly repayments:
- 30 June 2023 – $8,569 (interest = $2,383.88, remaining principal = $43,814.88, interest rate = 4.77%)
- 30 June 2024 – $9,555 (interest = $3,613.52, remaining principal = $37,880.26, interest rate = 8.27%)
- 30 June 2025 – $9,681 (interest = $3,319.97, remaining principal = $31,519, interest rate = 8.77%)
Petra can repay the loan faster than the 7-year term if she chooses. Future repayments will depend on the benchmark rate for those years.
Additional tax considerations
The interest Petra pays is assessable income to the private company. Whether Petra can claim a tax deduction on the interest will depend on how the loan was used. If for income-producing purposes, the interest is typically deductible.
Get Division 7A Loan Agreement advice from a Geelong accounting specialist
If you’ve taken drawings or loans from your company, speak to the experienced Geelong accountants at MacMillan Cowan & Co. Our team can help you stay compliant with Division 7A Loan Agreement requirements. We can also help manage your private company loan obligations with confidence.
There are various exemptions to Division 7A such as whether or not the company has Distributable Surplus. However, even if Division 7A does not apply, the loan could still be caught under FBT rules.
To make an appointment, please contact our office on (03) 5222 2866 or get in touch via our online contact form.