• Minimum yearly repayment

    There is a formula for the minimum yearly loan repayment that calculates the annual repayment of principal and interest required to repay the amalgamated loan over the maximum term for amalgamated loans of that type. The formula is:

    Formulae for minimum yearly payment.

    The 'amount of the loan' referred to in the formula is the amount of the amalgamated loan.

    The minimum yearly repayment needs to be worked out for each income year after the year in which the loan is made.

    If the private company has more than one amalgamated loan, each amalgamated loan is considered separately. They are not to be grouped for the purposes of working out a minimum yearly repayment. There will be a minimum yearly repayment for each amalgamated loan.

    A number of special concepts apply to the minimum yearly repayment formula. They are the:

    • amount of loan not repaid by the end of the previous income year
    • current year's benchmark interest rate
    • remaining term of the loan.

    How do you work out the amount of the loan not repaid by the end of the previous income year?

    As a general rule, the amount of the loan not repaid by the end of the previous income year is worked out by subtracting from the opening balance of the amalgamated loan at the beginning of the previous income year the amount of principal repaid during that income year. That is, how much of the principal remains unpaid at the end of the previous year of income.

    The calculation differs depending on whether the income year is the first year after the amalgamated loan is made or the second or subsequent years after the amalgamated loan is made.

    The first income year after the amalgamated loan is made

    For the first income year after the amalgamated loan is made:

    • there is no need for interest payable to be worked out in the year the loan is made
    • the amount of the loan not repaid by the end of the previous income year is worked out by subtracting the total principal repayments made before the private company's lodgment day from the original amount of the loan.

    If no repayments are made before the lodgment day the balance of the amalgamated loan not repaid before the end of the previous income year is the sum of the constituent loan balances at the end of that year.

    Example 6

    During the 2007-08 income year a private company made loans of $50,000 and $25,000 to a shareholder.

    The loans were made under complying written loan agreements. Both loans are unsecured loans and have a term of seven years with interest rates set at the benchmark interest rates.

    On 31 August 2008 the shareholder made a repayment of $20,000 on the $50,000 loan.

    The private company's lodgment day for its 2007-08 income tax return was 15 May 2009 and the return was lodged on that date.

    The amount of the amalgamated loan not repaid by the end of the 2007-08 income year is $55,000.

    The second and subsequent income years after the amalgamated loan is made

    The amount of the amalgamated loan not repaid by the end of the income year is worked out on the basis that interest is payable on the balance of the amalgamated loan from time to time in the year at a rate equal to the benchmark interest rate for the year of income.

    For the second income year (and following years), to calculate the amount of the loan not repaid by the end of the previous income year you need to know how much of the repayment made in the income year is attributable to interest and how much is applied to reduce the principal. To calculate this, you need to apply the relevant benchmark interest rate to the amounts outstanding from time to time in the year. Note that even if the interest rate in the written agreement is different from the benchmark interest rate, you still use the benchmark interest rate.

    The amount of the loan repaid during an income year is obtained by deducting the interest calculated from the actual repayments made during the year. The opening balance of the loan for the next year is the opening balance at the beginning of the previous year less the principal repaid during that year.

    Where a repayment is made before the private company's lodgment day for the year in which the amalgamated loan is made, the principal amount at 1 July of the first income year after the loan is made is not the sum total of the constituent loans at 1 July. Rather it is the sum of the constituent loans immediately before the lodgment day. For this purpose, payments made before lodgment day are taken to have been made in the year the amalgamated loan is made. Example 7 shows how repayments before the lodgment day are taken into account for the purposes of working out the opening balance of the amalgamated loan for the second income year after the amalgamated loan is made.

    Example 7

    Same facts as in example 6 except on 30 May 2009 the shareholder paid the private company a further $8,000, being a $4,000 payment for each loan. No other repayments were made during the 2008-09 income year.

    Calculations:

    Interest is calculated annually in arrears by reference to the daily balance throughout the year as follows:

     

    Credit
    $

    Loan balance
    $

    Principal at
    01/07/2008

     

    55,000.00

    Repayment at
    30/05/2009

    8,000.00

    47,000.00

    Interest payable

    = (interest payable on $55,000 from 01/07/2008 to 29/05/2009) +
    (interest payable on $47,000 from 30/05/2009 to 30/06/1009

    = (9.45%   $55,000   333/365) +
    (9.45%   $47,000   32/365)

    = $4,741.82 + $389.39

    = $5,131.21

    Of the $8,000 repayment made on 30 May 2009, $5,131.21 is taken to have been applied against the interest amount and $2,868.79 is taken to have been applied against the loan principal. This leaves $52,131.21 as the amount of the loan not repaid by the end of the income year. This figure is used to work out the minimum yearly repayment for the 2009-10 income year, which is the opening balance of the amalgamated loan for the second income year after the amalgamated loan is made.

    The payment made before the lodgment day is reflected in the opening balance at 1 July 2008.

    If the actual interest rate used in the written agreement exceeds the benchmark rate, the 'amount of the loan not repaid by the end of the previous income year will be a notional amount.

    How do you work out the remaining term?

    The remaining term is the difference between:

    • the number of years in the longest constituent loan
    • the number of years between the end of the private company's income year in which the loan was made, and the end of the private company's income year before the income year for which the minimum yearly repayment is being worked out.

    If the answer is not a whole number, it is rounded up to the next whole number.

    Example 8

    Same facts as for example 7.

    How do you calculate the minimum yearly repayment for the income year ended 30 June 2009?

    To work out the first minimum yearly repayment, the amount of the amalgamated loan not repaid by the end of the 2007-08 income year is $55,000 (loans made less principal repayments made before the lodgment day for 2007-08 income year) and the benchmark interest rate for the income year ended 30 June 2009 is 9.45%.

    The remaining term is worked out as the difference between:

    • the number of years in the longest constituent loan included in the amalgamated loan (seven years)
    • the number of years between the end of the private company's income year in which the loan was made (2007-08), and the end of the private company's income year before the income year for which the minimum yearly repayment is being worked out (2007-08), that is 0 years.

    The remaining term is seven years (that is, 7 - 0 = 7).

    The minimum yearly repayment for the income year ended 30 June 2009 is worked out as follows:

    Example 8 formulae and minimum yearly repayment.

    Determining whether there is a shortfall

    In determining if there is a minimum yearly repayment shortfall ,all repayments made during the 2008-09 income year, including those made prior to the private company's lodgment day for the 2008-09 year, are taken into account.

    The total of the repayments made in the 2008-09 income year is $28,000 and as this exceeds $11,093.25, there is no shortfall and therefore no deemed dividend arises for the 2008-09 income year.

    How do you calculate the minimum yearly repayment for the income year ended 30 June 2010?

    The amount of the loan not repaid by the end of the previous income year (that is, the year ended 30 June 2009) is worked out using the minimum yearly repayment formula.

    The amount of the loan not repaid by the end of the previous income year is $52,131.21 (see conclusion to example 8).

    The benchmark interest rate for 2009-10 is $5.75%.

    The remaining term is worked out as the difference between:

    • the number of years in the longest constituent loan included in the amalgamated loan (seven years)
    • the number of years between the end of the private company's income year in which the loan was made (2007-08) and the end of the private company's income year before the income year for which the minimum yearly repayment is being worked out (2008-09), that is one year.

    The remaining term is six years (that is, 7 - 1 = 6).

    The minimum yearly repayment for the 2009-10 income year is worked out as follows:

    Determining whether there is a shortfall

    The shareholder would need to make repayments on the loan totalling at least $10,581.92 to not trigger any Division 7A dividend.

      Last modified: 27 Jul 2016QC 17341