What is the maximum term?
The maximum term for a loan secured by a mortgage over real property is 25 years. The whole of the loan must be secured by a registered mortgage over the property. When the loan is first made, the market value of the property (less liabilities secured over the property in priority to the loan) must be at least 110% of the amount of the loan.
The maximum term for any other loan is seven years.
During the 2006-07 income year, Frame Pty Ltd made an unsecured loan to Penelope, a shareholder of Frame Pty Ltd. The term of the loan is years. The loan will not be treated as a dividend in the 2006-07 income year if it is put under a written agreement before the private company's lodgment day, which specifies the term of the loan, and the rate of interest payable for the 2007-08 and 2008-09 income years equals or exceeds the benchmark interest rate for each of those years.
From the 2006-07 income year, certain loans can be refinanced without causing a deemed dividend.
- An unsecured loan which is converted to a loan secured by a registered mortgage over real property can have the loan term extended. The maximum term of the loan becomes 25 years less the period of the term already expired when the loan was unsecured.
- A secured loan can also be converted to an unsecured loan but there will be a corresponding reduction in the loan term. The maximum term of the unsecured loan is seven years if the remaining term on the unsecured loan at the time of conversion was 18 years or less. If the secured loan has already been in place for more than 18 years, the maximum term of the unsecured loan will be reduced so that the total term of the loan (in both its secured and unsecured form) will be no more than 25 years. That is, you deduct from seven years the difference between:
- the length of the period starting when the loan was made and ending when the loan was converted
- 18 years.
Hilda Pty Ltd has made a loan secured by a mortgage over real property to an associate of a shareholder, Sachin. The term of the loan was 25 years. However, after 20 years, the terms of the loan are changed so it is no longer secured by a mortgage over real property. If the expired term of the old secured loan was less than 18 years, the maximum term of the unsecured loan would be seven years. However in this instance, the original secured loan had already been in place for more than 18 years. As a result, in the written agreement governing the new loan, the maximum term of the loan can be five years (that is, seven years minus the result of 20 years minus 18 years, which equals five years).