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  • The relationship between Division 7A of the ITAA 1936 and 'at call' loans

    Division 7A of the Income Tax Assessment Act 1936 deals with different situations from that to which Division 974 of the Income Tax Assessment Act 1997 applies.

    Division 7A treats certain amounts paid, lent or forgiven by private companies to certain associated persons (including individual shareholders) as assessable dividends. Division 7A of the ITAA 1936 thus deals with the situation where a company pays or lends to, or forgives an amount owing by, a shareholder, former shareholder, or an associate of a shareholder, of the company. That is, the company is paying (or lending to or forgiving) the shareholder etc.

    In contrast, the debt/equity rules which apply to 'at call' loans deal with the situation where the shareholder, or connected entity, advances money to the company.


    Assume a shareholder has made an undocumented $50,000 'at call' loan with an uncertain term to a company on 1 July 1997, on the understanding that interest may be paid on the loan from time to time. The loan is still not formalised at 1 July 2005. The company has an annual turnover of $21 million.

    The company does not meet the small business carve-out test in this instance. The annual turnover test is not satisfied as the company has a turnover greater than $20 million.

    Accordingly, the 'at call' loan will give rise to an equity interest. The company will have a non-share capital account. It will also credit the non-share capital account to the value of the 'at call' loan to account for the equity interest.

    The company repays $10,000 to the shareholder on 1 January 2006. For any repayments the company makes after 1 July 2005, it will debit its non-share capital account. Therefore, it will debit its non-share capital account for $10,000. The transactions above are illustrated in the following non-share capital account:

    Non-share capital account

    By keeping the loan 'at call' the company may, in certain circumstances, attract the application of section 45B of the ITAA 1936.

    If the company wants to make the 'at call' loan a debt interest, it will have to formalise the loan, by making it for a fixed term of up to 10 years, or, if the loan is for a term greater than 10 years or has no fixed term, using an arm's length interest rate. It is advisable that the loan with these amended terms be appropriately documented.

    End of example
      Last modified: 23 Jan 2017QC 18207