Be prepared for minimum yearly repayments on your Company Div 7A Loans
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’.
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 balance sheet of the company 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 from your company are loans by the company to the person taking the drawings. If these drawings exceed the amounts otherwise owed to the drawer as at 30 June, a loan to the person will exist and the drawer of the funds will need to determine what action they need to take to avoid a deemed dividend arising.
The tax law says that if you do not fully repay the loan by the due date for lodgement of the company’s tax return, or the actual date of lodgement of the tax return (whichever is earlier), the loan will become a deemed unfranked dividend to the person who borrowed the money for the year ended 30 June 2024.
Alternatively, you can place the loan under the terms of a complying Division 7A loan agreement to stop the deemed dividend arising for the full amount of the loan. Under these conditions, the loan must be repaid on a principal and interest basis over a maximum period of 7 years. However, if the loan is secured by a mortgage over real property (and other conditions are met), the loan can be repaid over a maximum period of 25 years.
If a loan is put under the terms of a complying Division 7A loan agreement, the interest rate charged must be at least the ‘benchmark interest rate’. This rate varies every year and is set by the ATO each year for the following year. For the year ending 30 June 2025, the rate is 8.77%.
When an amount has been borrowed from a private company under the terms of a Division 7A complying agreement, each year, the borrower is required to pay, on or before 30 June, the ‘minimum yearly repayment’. To the extent this amount is not paid by the required date, the shortfall will constitute a deemed unfranked dividend in that year.
Here is an example.
Great Calculations Pty Ltd lent $50,000 to one of its shareholders, Maureen, on 9 May 2022. Maureen could not repay all of the funds by the tax return lodgement date of the company for the year ended 30 June 2022 so she entered into a complying Division 7A loan agreement with the company for a term of 7 years. This means she needs to make minimum yearly repayments on the loan by 30 June 2023, 2024, 2025, 2026, 2027, 2028 and 2029.
She is permitted to pay off the loan faster than the 7 years, if she chooses.
The minimum yearly repayments are as follows:
• Year ended 30 June 2023 - $8,569 (interest = $2,383.88, remaining principal =$43,814.88, interest rate = 4.77%)
• Year ended 30 June 2024 - $9,555 (interest = $3,613.52, remaining principal = $37,880.26, interest rate = 8.27%)
• Year ending 30 June 2025 - $9,681 (interest = $3,319.97, remaining principal = $31,519, interest rate = 8.77%)
The payments for the remaining years cannot be calculated yet because the benchmark interest rate for those years is not yet known.
Importantly, Maureen must remember that this financial commitment will arrive every 30 June while the loan is outstanding, and she must be prepared for it.
The interest payable to the private company is, of course, assessable income to the company. Whether the interest payable by Maureen is tax deductible will depend on the purpose for which she borrowed the money. If it is for an income producing purpose, she would normally be able to claim a tax deduction for the interest payments to the company.
Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.