Division 7A - A guide to calculating payments forming part of the 'corrective action' in Law Administration Practice Statement PS LA 2007/20

The Commissioner has issued a Practice Statement Law Administration PS LA 2007/20 outlining the approach for the exercise of the discretion in respect of the 2001-02 to 2006-07 income years where specific corrective action has been taken on or before 30 June 2008.

The practice statement provides:

• a simple way for most taxpayers to get on a compliant footing going forward without the need to apply to the Commissioner in writing to exercise his discretion to disregard each deemed dividend, and
• guidance to taxation officers when considering whether or not to exercise the Commissioner's discretion to disregard a deemed dividend that has arisen in the 2001-02 to 2006-07 income years.

Corrective action can be made in the form of a payment or payments that in total equal the total amount of the minimum yearly repayments that would have been payable throughout the period that began with the year in which the deemed dividend arose. Such a payment is made up of two components:

• Capital component - an amount equalling the difference between the original amount of the loan and the carried forward loan balance on 1 July 2008 if all complying minimum yearly repayments had been made (less any actual capital repayments made prior to 1 July 2008), and
• Interest component - an amount equalling the sum of the annual interest that would have accrued on the loan from the date the loan should have commenced with interest compounding (less any interest actually paid prior to 1 July 2008).

Interest accrued is compounded in the calculation to take account of the fact that minimum yearly repayments have not previously been fully met.

More detail on this practice statement is available in Division 7A - Commissioner's Discretion to disregard a deemed dividend in the 2001-02 to 2006-07 income years.

Below are examples of how to calculate the payment to satisfy the specific corrective action described in the practice statement.

Example 1 X Co loans a shareholder, Mr X, $1,000 in the 2002/03 income year. As such, if a complying Division 7A loan had been put in place repayments would not commence until the 2003/04 year. In this case no repayments have been made. To calculate the required corrective payment under the practice statement, payment then the interest component would be calculated as shown in Table A.

Table A - Interest Component Compounding Calculation

	Actual balance
Year ending 30 June	Opening Balance	Interest	Closing Balance
2003	-	-	-
2004	$1,000.00	$65.50	$1,065.50
2005	$1,065.50	$75.12	$1,140.62
2006	$1,140.62	$83.27	$1,223.88
2007	$1,223.88	$92.40	$1,316.29
2008	$1,316.29	$105.96	$1,422.25
		$422.25

The interest component is $422.25.

For the same $1,000 loan the capital component would be calculated as shown in Table B.

Table B - Capital Component Calculation

	Notional Balance
Year ending 30 June	Opening Balance	Interest	Notional Repayment	Closing Balance
2003	-	-
2004	$1,000.00	$65.50	($182.65)	$882.85
2005	$882.85	$62.24	($185.50)	$759.58
2006	$759.58	$55.45	($186.75)	$628.29
2007	$628.29	$47.44	($187.80)	$487.93
2008	$487.93	$39.28	($189.50)	$337.70

The capital component is the difference between the original loan amount and the balance as at 30 June 2008 when it is assumed the actual payment is made. In this case the capital component calculation is

$1,000 - $337.70 = $662.30.

The total payment required would be $662.30 + $422.25 = $1084.55.

Simplified method

The simplified method using Tables C & D below ensure that in the circumstances listed the minimum payment required under the 'corrective method' will be met. This is because under this method the interest and capital payment factors have been rounded up at the third decimal point to ensure that at least the minimum required corrective payment is made.

The table below (Table C) can be used if:

• no repayments have previously been made,
• the loan period is 7 years, and
• the payment under the 'corrective action' is made on 30 June 2008.

Table C: 7 Year Loans

Year loan should have been taken out	Year first repayment should have occurred	Interest factor (a)	Capital factor (b)	Total 'corrective action' payment factor (c)
2001/02	2002/03	0.512	0.826	1.338
2002/03	2003/04	0.423	0.663	1.086
2003/04	2004/05	0.335	0.510	0.845
2004/05	2005/06	0.247	0.367	0.614
2005/06	2006/07	0.163	0.235	0.398
2006/07	2007/08	Normal rules apply

To calculate the amount of the total payment required under 'corrective action'

• multiply the initial loan amount by factor (c) for the year the loan should have been taken out.

This is the amount to be repaid on 30/6/08 by the shareholder or associate to the private company.

To calculate the amount of interest received by the private company as part of the 'corrective action' payment made on 30/6/08

• multiply the initial loan amount by factor (a) for the year the loan should have been taken out.

This is the interest amount to be declared in the private company 2008 tax return.

To calculate the carried forward balance on the loan as at 1/7/08

• multiply the initial loan amount by [1 minus factor (b)] for the year the loan should have been taken out.

This is then the starting balance for calculating minimum yearly repayments for the 2008/09 year.

Example 2 For example, if a $100,000 loan over 7 years should have been taken out in the 2004/05 year and a 'corrective action' payment is planned for 30/6/08 then The amount of the payment would be $100,000 x 0.614 = $61,400. The interest component of this would be $100,000 x 0.247 = $24,700. The carried forward balance on 1/7/08 would be $100,000 x (1-0.367) = $63,300.

The table below (Table D) can be used if:

• no repayments have previously been made
• the loan period is 25 years, and
• the payment under the corrective action is made on 30 June 2008.

Table D: 25 Year Loans

Year loan should have been taken out	Year first repayment should have occurred	Interest factor (a)	Capital factor (b)	Total corrective action payment factor (c)
2001/02	2002/03	0.512	0.112	0.624
2002/03	2003/04	0.423	0.088	0.511
2003/04	2004/05	0.335	0.066	0.401
2004/05	2005/06	0.247	0.047	0.294
2005/06	2006/07	0.163	0.030	0.193
2006/07	2007/08	Normal rules apply

To calculate the amount of the total payment required under 'corrective action'

• multiply the initial loan amount by factor (c) for the year the loan should have been taken out.

This is the amount to be repaid on 30/6/08 by the shareholder or associate to the private company.

To calculate the amount of interest received by the private company as part of the 'corrective action' payment made on 30/6/08

• multiply the initial loan amount by factor (a) for the year the loan should have been taken out.

This is the interest amount to be declared in the private company 2008 tax return.

To calculate the carried forward balance on the loan as at 1/7/08

• multiply the initial loan amount by [1 minus factor (b)] for the year the loan should have been taken out.

This is then the starting balance for calculating minimum yearly repayments for the 2008/09 year.

Example 3 For example, if a $200,000 loan over 25 years should have been taken out in the 2003/04 year and a 'corrective action' payment is planned for 30/6/08 then The amount of the payment would be $200,000 x 0.401 = $80,200 The interest component of this would be $200,000 x 0.335 = $67,000 The carried forward balance on 1/7/08 would be $200,000 x (1-0.066) = $186,800 If no repayments have previously been made, the loan period is 25 years and the payment under the corrective action is made on 30 June 2008 then the following table can be used to calculate the minimum payment required to satisfy corrective action.