Some payments you make to a private company for a loan will not be taken into account for the purpose of working out the minimum yearly repayment or how much of the loan has been repaid.
A payment for a loan will not be taken into account if a reasonable person would conclude that when the payment was made you intended to obtain a loan from the private company of an amount similar to or larger than the payment.
Changes made to Division 7A with effect from 1 July 2009 ensure that a loan repayment will also not be taken into account if a reasonable person would conclude that to make the payment you obtained, before the payment was made, a loan from the private company of a total amount similar to, or larger than, the payment.
Alicia obtains a loan of $10,000 from Cleary Pty Ltd. Alicia has until the lodgement day to repay the loan. Two weeks before the lodgement day Alicia obtains a further $10,000 from Cleary Pty Ltd. She then repays the original $10,000 loan a week before the lodgement day.
The repayment of the original $10,000 loan is not a repayment for the purposes of sections 109D. This is because Alicia has borrowed a similar amount from Cleary Pty Ltd and in this case, a reasonable person would conclude that the loan was obtained to make the repayment of the original $10,000.
The original $10,000 loan is treated as a deemed dividend subject to the distributable surplus of the private company.
Some payments will always be taken into account, even if there is an intention to obtain another loan at the time the payment is made. These payments are made by offsetting the following amounts against the balance of the loan:
- a dividend payable to you by the private company
- work and income support related withholding payments and benefits payable by the private company to you (for example, salary or wages)
- payments covered by a voluntary agreement to withhold
- if you transferred property to the private company, an amount equal to the difference between the arm's length value of property and the amount that the company has already paid you for the transfer.
In addition, a payment by another entity to the private company on your behalf will be taken into account, regardless of any intention to obtain another loan if the amount of the payment:
- is payable by the other entity to you
- forms part of your assessable income in the income year in which the payment is made, or in an earlier income year.
An entity can include an individual, company, trust or partnership.