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Jurisdiction: Australia Wide
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Only a "private" Pty Ltd Company can fully use the "Div 7A loan agreement".
This hint is provided by Law Central Legal.
Ever grabbed your Company cheque book and purchased something personal for yourself? Then you said, "I will leave it to my accountant to document that later". That documentation process is now much more complex than it once was.
Division 7A of the Income Tax Assessment Act 1936 deems the money you take to be a "bad" type of dividend. It is usually better to "borrow" the money from the Company, rather than just "take" it. In order to "borrow" the money, you must put a loan agreement in place. This is the loan agreement that you are building.
The loan agreement for any money you have borrowed during the year must be in place before the "lodgement day" for the company return for that year of income, which is the earlier of the due date for lodgement and the actual date of lodgement.
Div 7A operates when one of four things happens and you are either a shareholder of the company, or are an "associate" of a share holder.
(a) your Company pays you money;
(b) your Company lends you money;
(c) your Company forgives a debt to you; and
(d) your Trust does one of the things referred to in (a), (b) or (c) in circumstances where a company of which you are a shareholder or and associate of a shareholder has "unpaid present entitlement" from that trust.
Division 7A can also operate when an amount paid by the Company to you or your associate through an interposed entity.
Where circumstance (d) above occurs, you need Law Central's "UPE Div 7A" Loan Agreement.
This hint is provided by Law Central Legal.
The purpose of Div 7A is "to ensure that private companies will no longer be able to make tax-free distributions of profits to shareholders (and their associates) in the form of payment or loans" (Explanatory Memorandum to Act No 47 of 1998).
In particular, the Division was intended "to ensure that all advances, loans and other credits (unless they come within specified exclusions) by private companies to shareholders (and their associates), are treated as assessable dividends to the extent that there are realised or unrealised profits in the Company. In addition, debts owed by shareholders (or associates) which are forgiven by private companies are treated as dividends."
Division 7A was introduced because the old section 108 (which also deemed certain amounts to be dividends) only applied when the Commissioner formed the opinion that an amount loaned, paid or credited represented a distribution of profits. However, such opinion could not generally be formed without information which was usually only available after conducting an audit. On the other hand, Division 7A was intended to operate automatically i.e. without requiring the exercise of the Commissioner's discretion.
This Div 7A Loan Agreement ensures the money you take out of your Company (or Trust) is a loan. This avoids the "bad dividends" situation.
This hint is provided by Law Central Legal.
While the Div 7A loan agreement you are building is designed to comply with the law, you need to also obey the rules. These include:
1. The Div 7A loan agreement must be signed before the "lodgement date" of the Company return for the year of income in which your Company lends you the money.
2. The loan must be in writing.
3. The loans can be for no more than 7 years. (If you want to secure the loan, then you can borrow the money for 25 years. We don't supply those "secured" loans at LawCentral. You would need to use lawyers like Law Central Legal).
4. You have to pay interest on the loan at least equal to the "benchmark interest rate".
5. You have to pay all the interest each financial year and make minimum yearly repayments.
6. You and your "associates" such as family members need their own Div 7A loan agreements.
7. You need to sign an agreement in every financial year in which you receive a loan from the Company.
The loan agreement you are building is in writing. It is for a loan (unsecured) for 7 years. Interest is payable at the Tax Acts rates (as set from time to time).
This hint is provided by Law Central Legal.
You date the Loan Agreement AFTER you sign it. You hand write it in.
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Each state and territory has its own stamp duty laws. Division 7A Agreement documents are exempted from paying stamp duty in every state and territory except South Australia (In South Australia, the stamp duty is $10.00. There is no charge for duplicates). Therefore, except for South Australia, there is no requirement to lodge this Div 7A Loan Agreement at the Stamps Office.
If you want the full story on stamp duty, you are welcomed to go onto the Links Page where we have put together a full paper on the topic (accessed through My Account > Purchased Documents > Div 7A Loan Agreement).
This hint is provided by Law Central Legal.
You have to do a new Div 7A Loan Agreement in each year in which you borrow money from your company.
The interest rate is the "benchmark interest rate" set each year by the ATO. It can be found on the ATO's website.
You will also need a separate loan agreement with each company that has lent you money.
If members of your family have been left money by your Company, then they need their own separate loan agreements.
This hint is provided by Law Central Legal.
Don't worry. The Div 7A Loan Agreement uses the ATO's set interest rate. It changes every year. Whatever the interest rate is, that is the interest rate of your Div 7A Loan Agreement. The facility just takes on the interest rate that is set by the ATO.
This hint is provided by Law Central Legal.
What about if you borrow more money from the Company? Again, that is fine. The amount you owe your Company is as set out in the Company financial records (such as the Balance Sheet) from time to time.
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This is an unsecured Div 7A Loan Agreement. It is for the term of 7 years.
If the shareholder borrowing the money from his Company has some property, then he can do a 25 year Div 7A loan agreement. He then has to pay back the loan in 25 years (not 7).
You are only building a 7 year loan agreement. To do a 25 year Div 7A you need a mortgage registered over the land. It is likely that you will need to consult a lawyer to prepare such a mortgage.
This hint is provided by Law Central Legal.
No. This Div 7A Loan Agreement is not for the Debt/Equity Rules.
You need a Div 7A when your Company lends you money. However, when you lend money to your Company (the opposite), then you need a "Loan Agreement (including Debt/Equity)".
Don't get the two confused.
This hint is provided by Law Central Legal.
To be a complying Division 7A Loan Agreement, you need to set an interest rate. However, that interest rate changes each year. The Australian Tax Office sets a new Benchmark interest rate at the beginning of each financial year. The rates can be found on the ATO's website.
This Benchmark interest rate is the minimum interest rate your Company can charge you for the money it lends you.
What we have done is state in the Division 7A Loan Agreement that the interest rate is the "Benchmark interest rate as set by the Australian Tax Office for each financial year, for the purposes of the deemed dividend provisions of Div 7A of ITAA 1936".
Because the Benchmark rate changes each year and your Division 7A Loan Agreement changes with it. Your Loan Agreement is therefore perfectly up-to-date every year as far as the interest rate is concerned. This saves you a lot of worry.
The benchmark interest rate is the same as the Indicator Lending Rates - Standard Bank Variable Housing Loans Interest Rate last published by the Reserve Bank of Australia before the start of the income year. Usually, the Tax Office confirms the benchmark interest rate in a Tax Determination).
This hint is provided by Law Central Legal.
All companies created in Australia are now given a distinct identification number. This is to stop confusion for companies that have similar names. An “ACN” is an abbreviation for “Australian Company Number”.
You can get the "ACN" 24 hours a day and for free from www.asic.gov.au.
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You can use either the registered office or business address.
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That is fine.
Just put the accounting practice name in the "Street" field. For example,
STREET: Earnest and Young, Chartered Accountants, 24 Roberts Road
SUBURB: Double Bay
STATE: New South Wales
This hint is provided by Law Central Legal.
The Borrower borrows money from the Company. You put the Borrower's address on this page.
You can put in either the Borrower's postal, home or office address.
This hint is provided by Law Central Legal.
To be a complying Division 7A Loan Agreement, you need to set an interest rate. But the relevant minimum interest rate changes each year. The Australian Tax Office sets a new Benchmark interest rate at the beginning of each financial year.
This Benchmark interest rate is the minimum interest rate your Company can charge you for the money it lends you.
What we have done is state in the Division 7A Loan Agreement that the interest rate is the "Benchmark interest rate as set by the Australian Tax Office for each financial year, for the purposes of the deemed dividend provisions of Div 7A of ITAA 1936".
The Benchmark rate changes each year and your Division 7A Loan Agreement changes with it.
This hint is provided by Law Central Legal.
You should clearly evidence the loan amounts in the company's accounts as required by Taxation Determination TD 2008/8.
This hint is provided by Law Central Legal.
The Australian Tax Office sets a new Benchmark interest rate at the beginning of each financial year. Your Company has to charge at least that minimum interest rate.
For example, in the 2022/23 financial year, the Benchmark interest rate was 4.77%. The Benchmark interest rate for the 2023/24 financial year was 8.27%. In 2024/25, the benchmark interest rate was 8.77% and in 2025/26, the benchmark interest rate is 8.37%.
The legislation requires that you charge AT LEAST THE MINIMUM INTEREST RATE. If you charge less than the Benchmark, your Loan Agreement fails and you breach Division 7A.
How high can the interest rate be? It should be no higher than what the market would be charging you to borrow money. If you are a bad credit risk, you have no income and you have no assets, then you may be able to put the interest rate up to the current high credit card levels. You put in an interest rate that is commercial (provided that at all times it is above the ATO's Benchmark level).
CONFUSED?
Just leave the Loan Agreement as it comes out of your printer.
If you are confused but keen for your Company to charge a higher interest rate than the Benchmark rate, print out this hint and see your accountant.
Why would you want to charge a higher interest rate?
A Company pays tax at 30%. A person can pay tax at 45%. Therefore, you may want a Company to earn the income and pay tax at the lower rate. If you borrow money from your Company FOR AN INCOME PRODUCING PURPOSE - but not otherwise, then you as an individual will be able to claim a tax deduction for the interest you pay your Company. The higher the interest you pay, the bigger your tax break.
This hint is provided by Law Central Legal.
You have to pay off part of the capital each year, throughout the life of the 7 year loan.
You can however pay off more if you wish - but not less.
There is no legal requirement to document the precise payments required in this loan agreement. However, it is up to you to pay the correct amount of the capital (and interest for that matter) back to the company year.
This hint is provided by Law Central Legal.
The first type is when your Company lends you the money without any form of security. The second type is when the Company takes a mortgage over real estate to protect the loan. This is called a "SECURED Division 7A Loan Agreement". If you opt for the SECURED loan agreement, you can extend the term of the loan agreement to 25 years. LawCentral does not offer SECURED Division 7A Loan Agreements. You will need to go to a lawyer to get these special loans. However, they are not used that often.
This hint is provided by Law Central Legal.
Each state and territory has its own stamp duty laws. Division 7A Agreement document are exempted from paying stamp duty in every state and territory except South Australia (In South Australia, the stamp duty is $10.00. There is no charge for duplicates). Therefore, except for South Australia, there is no requirement to lodge this Div 7A Loan Agreement at the Stamps Office.
If you want the full story on stamp duty then you are welcomed to go onto the Links Page where we have put together a full paper on the topic (accessed through My Account > Purchased Documents > Div 7A Loan Agreement).
This hint is provided by Law Central Legal.
This document has been prepared by the law practice Law Central Legal
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