If you or an associate take a loan from your private company, it is important to understand the requirements of repaying the loan correctly for income tax purposes. Otherwise, you could find the loan treated as a Division 7A deemed dividend and included in your or your associates' assessable income. Division 7A is intended to prevent profits or assets being provided to shareholders or their associates tax free.
You can avoid a deemed dividend by making sure your loan is a Division 7A complying loan before your company's lodgement day and making minimum yearly repayments.
However, you cannot borrow further money or assets from the same company, directly or indirectly, to make minimum yearly repayments or repay the loan. If you do, these payments may not be taken into account as repayments for Division 7A purposes, potentially resulting in an assessable deemed dividend.
The Australian Taxation Office (ATO) are seeing situations where payments are being made on company loans that do not satisfy the requirements and will not be taken into account as repayments for Division 7A purposes. These include:
- loans being repaid shortly before the private company's lodgement day with the intention of directly, or indirectly, reborrowing a similar or larger amount from the same company
- money or assets that are directly, or indirectly, borrowed from a company in order to make payments, including minimum yearly repayments, for a loan from the same company.
DEEMED DIVIDEND
A deemed dividend may arise where a payment or other benefit is provided by a private company to a shareholder or their associate. The payment or benefit provided can be treated as a dividend for income tax purposes even if you or an associate treat it as some other form of transaction, such as a loan, advance, gift or writing off a debt. The deemed dividend is included in the assessable income of the shareholder or their associate.
The ATO publish information on the behaviours, characteristics and tax issues of privately owned and wealthy groups that attract their attention to help you get things right and be transparent in their dealings with you. The ATO’s attention is attracted when:
- amounts are taken from a company and not repaid
- a complying loan agreement has not been put in place
- minimum yearly repayments on a loan are not paid
- income from interest on a loan is not declared
- company funds or assets are used for private purposes
- transactions occur through interposed entities which appear to be an arrangement involving a payment or loan from the company to a shareholder or their associate
- money has been borrowed directly or indirectly, from a company to repay an existing loan, or make minimum yearly repayments on a complying loan, from the same company
- payments are made on an existing loan (either full amount or minimum yearly repayments) and when the payments were made the shareholder or their associate intended to, directly or indirectly, reborrow a similar or larger amount from that company
- arrangements appear to be designed to avoid the application of Division 7A or otherwise achieve an inappropriate tax advantage.
The ATO encourage you to check your private company loans and if you are concerned a payment will not be taken into account, speak to your registered tax adviser or contact the ATO.