About the Company Constitution (Add Div 7A)

On 22 December 2004, the Australian Taxation Office (“ATO”) released Tax Determination TD 2004/86. The ATO says that if a company’s constitution contains a clause that:

1. Sets out the terms of any loans made to shareholders; and
2. Satisfies the requirements set out in Section 109N of the Income Tax Assessment Act 1936 (“Act”)

Then the constitution is deemed to contain a written agreement for the purpose of Section 109N of the Act. In other words, you then have a complying Division 7A Loan Agreement always in place for all members.

The ATO also says that a company’s constitution is a written contract between the company and its members. Members are therefore already in a contract. The Division 7A Loan Agreement is just another extension of that contractual relationship. This satisfies the requirements of being a written agreement.

What happens if you don’t have a Division 7A clause in your Company Constitution or a stand alone written Division 7A Loan Agreement?

The Australian Taxation Office treats your loan as a dividend. The tax rate becomes a penalty of almost 100%.