• Loans

    34. What is a loan under Division 7A?

    For Division 7A purposes, a 'loan' includes:

    • an advance of money
    • a provision of credit or any other form of financial accommodation
    • a payment of an amount for, on account of, on behalf of, or at the request of a shareholder or shareholder's associate, if there is an obligation to repay the amount, and
    • a transaction which in substance effects a loan of money.

    For the purposes of Division 7A 'loan' has an extended meaning and in addition to including ordinary loans a 'loan' is defined to include the provision of credit or any other form of financial accommodation and transactions that in substance effect a loan of money. This is important when considering the application of Subdivision EA.

    From 16 December 2009, if a private company beneficiary, in respect of its unpaid present entitlement, provides financial accommodation to the trustee of a trust, or enters into a transaction with the trustee of a trust which in substance effects a Division 7A loan, it will be taken to make a loan to the trustee of the trust for Division 7A purposes.

    For the income year in which 1 July 2006 occurred and following years, a payment can be converted to a loan before the private company's lodgment day and have the Division 7A provisions relating to loans apply.

    (See subsections 109D(3) and109D(4A).)

    35. When is a loan made?

    A loan is taken to be made at the time the amount is paid to the shareholder or shareholder's associate by way of a loan.

    (See subsection 109D(4).)

    36. When will a loan be accepted as a loan made 'in the course of the winding-up' of a private company by a liquidator?

    A loan will be accepted as a 'loan made in the course of the winding-up of the company by a liquidator' when it is made after the winding-up is taken to have begun under corporations law.

    For a court ordered winding-up, this is generally taken to be on the day when the court order was made. For a voluntary winding-up, it is generally taken to be on the day on which the company passed the special resolution resolving that it be wound up voluntarily.

    (See section 109NA of the ITAA 1936 and sections 513A and 513B of the Corporations Act 2001.)

    37. What amount of a loan is taken to be a dividend?

    Private company loans made in the 2003-04 and earlier years of income

    The general rule is that the amount taken to be a dividend is the amount of the loan not repaid at the end of the income year, but the maximum amount of the dividend is the company's distributable surplus. However Practice Statement Law Administration PS LA 2005/3 (GA) sets out an administrative concession for the 2003-04 income year.

    Different rules may apply in relation to transactions to which Subdivision E of Division 7A applies.

    Trustee loans made prior to 12 December 2002

    The general rule is that the amount taken to be a dividend is the amount of the loan but the maximum amount of the dividend is the company's distributable surplus. Loan repayments do not reduce the amount of the dividend.

    Private company loans made in the 2004-05 and later years of income and trustee loans made on or after 12 December 2002

    The general rule is that the amount taken to be a dividend is the amount of the loan that has not been repaid before the 'lodgment day' for the year in question, but the maximum amount of the dividend is the company's distributable surplus.

    The 'lodgment day' is the earlier of the due date for lodgment and the date of lodgment of the lender's tax return for the year in which the loan is made. If the Commissioner has deferred the due date for lodgment of the tax return then the due date for lodgment is the deferred due date. The 'lender' is the private company or trustee that made the loan that is subject to Division 7A.

    The Commissioner has a discretion to disregard a deemed dividend or allow it to be franked if that dividend arises because of an honest mistake or inadvertent omission. This discretion, although a June 2007 amendment, applies in relation to the 2001-02 and later income years for a decision to disregard a deemed dividend and from 1 July 2002 for a decision to allow a deemed dividend to be franked. The Commissioner may make the decision subject to specified conditions See questions 17 to 22.

    (See subsections 109D(1), (1AA), (1A) and (2), section 109RB and Subdivisions E and EA.)

    38. What if the loan made during an income year is fully repaid before the lodgment day?

    Generally Division 7A has no application for:

    • private company loans made in the 2004-05 year of income or a later year of income, or
    • trustee loans made on or after 12 December 2002.

    The 'lodgment day' is the earlier of the due date for lodgment and the date of the lodgment of the lender's tax return for the year of income. If the Commissioner has deferred the due date for lodgment of the private company's tax return then the due date for lodgment is the deferred due date. The 'lender' is the private company or trustee that made the loan that is subject to Division 7A.

    However, certain repayments are not taken into account for Division 7A purposes.

    For the 2003-04 year of income or an earlier year of income private company loans must be repaid before the end of the income year. However Practice Statement Law Administration PS LA 2005/3(GA) sets out an administrative concession for the 2003-04 income year. Division 7A still applies if a trustee loan made before 12 December 2002 is repaid.

    (See subsections 109D(1), (1AA), (6) and section 109R.)

    39. Can a loan repayment be made after 'the required time' by way of a back-dated journal entry?

    No. The journal entry must reflect an underlying transaction which takes place by the 'required time'. Accordingly, if the underlying transaction takes place after the 'required time' but the journal entry is back-dated, the ATO will not accept that there has been a repayment for Division 7A purposes. .

    To be acceptable, the journal entry must be supported by adequate evidence to show that the underlying transaction has taken place. This may include, for example, a written agreement or company resolution to pay salary, to declare dividends, or to set-off amounts against the loan amount. For example, a private company resolves in October to pay its director sufficient fees to set off the minimum yearly repayment required for the income year ended on the previous 30 June. The private company purports to credit the set off on 30 June by way of a back-dated journal entry. The ATO will not accept that there has been a repayment for Division 7A purposes as the underlying transaction, being the decision to pay the director, took place after 30 June.

    The 'required time' is as follows.

    • For repayment of a private company loan made in the 2004-05 or later income years or a trustee loan made on or after 12 December 2002:
      • before the 'lodgment day' of the 'lender'.
       
    • For repayment of a private company loan made in the 2003-04 or earlier income years:
    •  
    • For a minimum yearly repayment of a private company loan for all years and trustee loans made on or after 12 December 2002:
      • by 30 June of the income year in which the minimum yearly repayment is due.
       

    The 'lodgment day' is the earlier of the due date for lodgment and date of lodgment of the lender's tax return for the income year in which the loan is made. If the Commissioner has deferred the due date for lodgment of the tax return then the due date for lodgment is the deferred due date.

    The 'lender' is the private company or trustee who made the loan that is subject to Division 7A.

    40. Can Division 7A apply to a loan made before 4 December 1997?

    Yes. Division 7A applies to loans made before 4 December 1997 that are varied on or after that date by extending their term or increasing their amount. Such loans are treated as having been made on the new terms at the time of the variation.

    (See subsection 109D(5).)

    41. What loans are not treated as dividends?

    The following loans are not treated as dividends under Division 7A.

    • Loans fully repaid before the 'required time', to the extent the repayments are taken into account.
    • Loans to other companies, otherwise than in their capacity of trustee, unless the company is an interposed entity to which Subdivision E of Division 7A applies.
    • Loans that are otherwise assessable or specifically excluded from assessable income.
    • Loans made in the ordinary course of business and on the usual terms for similar loans made to parties at arm's length.
    • Loans put under a written agreement by the 'required time' and which meet the minimum interest rate and maximum term criteria, provided minimum yearly repayments are made in subsequent years.
    • Loans made in the course of the winding-up of the company by a liquidator that are fully repaid by the end of the following year of income.
    • Loans made solely for the purpose of enabling the shareholder or shareholder's associate to acquire certain shares or rights in the company under an employee share scheme (within the meaning in the Income Tax Assessment Act 1997) to which Subdivisions 83A-B and subsections 83A-35(3) to (9) of that Act apply or Subdivisions 83A-C applies.

    The 'required time' is as follows.

    • For full repayment of private company loans made in the 2004-05 and later income years or trustee loans made on or after 12 December 2002:
      • before the 'lodgment day' of the 'lender'.
       
    • For full repayment of private company loans made in the 2003-04 and earlier income years:
    •  
    • For putting a loan under a qualifying written agreement:

    Private company loans made in the 2003-04 and earlier income years:

     

    Private company loans made in the 2004-05 and later income years and trustee loans made on or after 1 December 2002:

    • before the 'lodgment day' of the 'lender'.
     

    The 'lodgment day' is the earlier of the due date for lodgment and date of lodgment of the lender's tax return for the income year in which the loan is made. If the Commissioner has deferred the due date for lodgment of the tax return then the due date for lodgment is the deferred due date.

    The 'lender' is the private company or trustee who made the loan that is subject to Division 7A.

    (See subsection 109D(1) and sections 109E, 109K, 109L, 109M, 109N, 109NA, 109NB, 109P and 109R, Subdivision E and Subdivision EA.)

    42. How does Division 7A apply to a shareholder's or beneficiary's loan account?

    Each entry in a shareholder's or beneficiary's loan account needs to be analysed to determine what type of transaction it represents (that is, whether it is a payment, a loan or a debt forgiveness to which Division 7A applies). Also, entries representing loan repayments must be analysed to determine if they can be taken into account in working out the amount of a loan repaid or the minimum yearly repayment.

    The balance of a shareholder's or beneficiary's loan account in the company or trustee accounts respectively may be in debit or credit at the end of the year of income. Although a debit balance at the end of a year of income may indicate that there are loans that have not been repaid and a credit balance may indicate that no loans remain unpaid, neither result leads to the automatic conclusion that Division 7A does or does not apply. For example, a debit balance may reflect loans made before 4 December 1997 or a credit balance may include loan repayments that must be disregarded for Division 7A purposes.

    For private company loans made in the 2004-05* and later income years and trustee loans made on or after 12 December 2002, loan repayments made after year end and before the 'lodgment day' are taken into account in determining the amount of the loan taken (subject to the company's distributable surplus) to be a dividend. A deemed dividend arising from a trustee loan made before 12 December 2002 is not reduced by a loan repayment regardless of when the repayment is made.

    The 'lodgment day' is the earlier of the due date for lodgment and the date of lodgment of the lender's tax return for the income year in which the loan is made. If the Commissioner has deferred the due date for lodgment of the tax return then the due date for lodgment is the deferred due date.

    The 'lender' is the private company or trustee who made the loan that is subject to Division 7A.

    * However Practice Statement Law Administration PS LA 2005/3 (GA) sets out an administrative concession for the 2003-04 income year.

    43. In calculating the amount of a shareholder's loan not repaid at the end of an income year, can a credit balance at the end of an income year in one shareholder's loan account be used to reduce the debit balance in another shareholder's loan account?

    No. Calculations are done in respect of transactions in the loan accounts of each individual shareholder, not by totalling the loan account balances of different shareholders.

      Last modified: 14 Sep 2010QC 16852