• Amalgamated loans

    60. What is an amalgamated loan?

    An amalgamated loan is taken to be made during an income year if one or more loans (called constituent loans) are made by the same 'lender':

    • to the same shareholder or shareholder's associate
    • during the income year
    • with a written agreement which meets the minimum interest rate and maximum term criteria for the purposes of subsection 109N(1)
    • with the same maximum term for the purposes of subsection 109N(3), and
    • which are not fully repaid by the 'required time'.

    The 'required time' is as follows.

    • For 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 private company loans made in the 2003-04 and earlier income years:
    •  

    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 109E(3).)

    61. What is the amount of an amalgamated loan?

    The amount of an amalgamated loan is the sum of the amounts of the loans (which make up the amalgamated loan) that have not been repaid:

    • for private company loans made in the 2003-04 or an earlier income year - at the end of the income year in which the amalgamated loan is made. However Practice Statement Law Administration PS LA 2005/3 (GA) sets out an administrative concession for the 2003-04 income year, and
    • for private company loans made in the 2004-05 or a later income year and trustee loans made on or after 12 December 2002 - before the 'lodgment day' for the income year.

    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 109E(3).)

    62. What is the amount of an amalgamated loan when an unsecured loan is converted to a secured loan?

    From the income year in which 1 July 2006 occurred, there is provision for an unsecured loan to be converted to a secured loan.

    When the term of a constituent loan is extended because the loan becomes secured by a registered mortgage over real property, a new amalgamated loan is taken to be made in the income year prior to the income year in which the conversion takes place.

    If the old amalgamated loan comprised other constituent loans which remain unsecured loans:

    • the constituent loan that has been secured is treated as a new amalgamated loan, and
    • the amount of the old amalgamated loan is reduced by the amount of the new amalgamated loan.

    (See subsections 109E(3A) and(3B).)

    63. Can loans made in different income years form one loan, so that a single repayment can be made against all loans?

    No. Loans made in different income years cannot be amalgamated. Separate minimum yearly repayment amounts are calculated for each amalgamated loan.

    (See subsections 109E(3) and (5).)

    64. When is an amalgamated loan treated as a dividend?

    From the income year in which 1 July 2006 occurred

    An amount is treated as a dividend in each income year the required minimum yearly repayment is not made. The amount treated as a dividend is the amount of the shortfall.

    For earlier income years

    Unless it has been fully repaid, the balance of an amalgamated loan is treated as a dividend in the first income year that repayments made on the loan are less than the minimum yearly repayment.

    Note: the Commissioner has discretions to disregard the deemed dividend in certain cases. See question 12 (General).

    (See subsections 109E(1) and (2), sections 109Q, 109RB and 109RD.)

    65. How is the minimum yearly repayment calculated?

    The minimum yearly repayment for an amalgamated loan is calculated using the following formula.

    Minimum yearly repayment formula

    The 'remaining term' is the difference between:

    • the longest term of any of the loans which make up the amalgamated loan, and
    • the number of years between the end of the income year in which the amalgamated loan was made, and the end of the income year before the income year for which the minimum yearly repayment is being worked out.

    If the result is not a whole number, it is rounded up.

    (See subsections 109E(5), (6) and (7).)

    66. How do you work out the 'amount of the loan not repaid by the end of the previous year of income' for the purposes of calculating the minimum yearly repayment amount?

    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 loan from time to time in the year at a rate equal to the benchmark interest rate for the 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, and
    • 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.

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

    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 repayments 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 current year. Note, even if the interest rate in the written agreement is different to 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 difference between the opening balance at the beginning of the previous year less the principal repaid during that year.

    Example:

    A private company loaned a shareholder $40,000 on 30 June 2006 under a written loan agreement that satisfies the requirements of section 109N. This was the only loan the company made to this particular shareholder in the 2005-06 year. The shareholder made two repayments to the loan of $10,000 each. The first payment was made on 1 January 2007 and the second was made on 30 June 2007. The benchmark interest rate was 7.55% for the 2006-07 year.

    Calculations:

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

     

    Credit
    $

    Loan balance
    $

    Principal at 1/7/2006

     

    40,000.00

    Repayment at 1/1/2007

    10,000.00

    30,000.00

    Repayment at 30/6/2007

    10,000.00

    20,000.00

     

    Interest payable

    =

    (interest payable on $40,000 from 1/7/06 to 31/12/06) + (interest payable on $30,000 from 1/1/07 to 29/6/07) + (interest payable on $20,000 from 30/6/07)

    =

    (7.55%   $40,000   184/365) + (7.55%   $30,000   180/365) + (7.55%   $20,000   1/365)

    =

    $1,522.41 + $1,116.98 + $4.14

    =

    $2,643.53

    Of the $20,000 repayments made during the income year, $2,643.53 is taken to have been applied against the interest amount and $17,356.47 is taken to have been applied against the loan principal. This leaves $22,643.53 as the amount of the loan not repaid by the end of the income year. This figure is used in working out the minimum yearly repayment for the 2006-07 income year.

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

    67. Is the 'amount of the loan not repaid by the end of the previous year of income' reduced if the private company is taken to have paid a dividend because of a minimum yearly repayment shortfall?

    No. Where minimum yearly repayments have not been made and a deemed dividend arises, the shareholder or the associate will still have the shortfall amount as an outstanding debt with the private company. The shareholder can either make the shortfall payment or ask the company to forgive the amount of the debt. In certain circumstances the forgiven debt may not give rise to a deemed dividend. See question 82 (Debts forgiven).

    (Subsections 109G(3A) and (3B).)

    68. What interest rate do you use to calculate 'the amount of the loan not repaid by the end of the previous year of income' when using the minimum yearly repayment formula?

    The 'amount of the loan not repaid by the end of the previous year of income' is calculated using the benchmark interest rate for that year, rather than the loan's actual interest rate.

    (See subsection 109E(7).)

    69. How and when can repayments of an amalgamated loan be made?

    Payments made on loans forming part of an amalgamated loan are treated as payments on the amalgamated loan. Hence, to repay an amalgamated loan, the underlying loans must be repaid.

    Repayments can be made by physically transferring money or by setting off mutual liabilities where journal entries represent the underlying transactions.

    Repayments of loans that are part of an amalgamated loan can be made at any time during the income year but must be made by the end of the income year for which the minimum yearly repayment was calculated.

    Some loan repayments are not taken into account for working out how much of the minimum yearly repayment has been paid.

    (See subsection 109E(1) and 109E(4) and section 109R.)

    70. In what circumstances can the Commissioner extend the period for repayments of amalgamated loans?

    For the 2006-07 and later income years the period for making a minimum yearly repayment may be extended by the Commissioner in cases where:

    • a deemed dividend would arise because the repayments made on an amalgamated loan fell short of the required minimum yearly repayment, and
    • the failure to make the minimum yearly repayment arose because of circumstances beyond the loan recipient's (that is, the shareholder or their associate) control.

    The Commissioner may specify a time for making payment of the shortfall.

    In making a decision, the Commissioner does not need to consider undue hardship.

    Circumstances beyond the loan recipients control would include where they:

    • have been in an accident and hospitalised at the time the minimum yearly repayment was due
    • are hospitalised because of an illness at the time the minimum yearly repayment was due
    • are prevented from making the minimum yearly repayment because their assets have been frozen by a Court
    • have a loan with a third party, for example a bank, and through subordination of one or more loans comprising their amalgamated loan, they are prevented from making any repayments on the subordinated loans.

    (See section 109RD.)

    71. How can the period for making a minimum yearly repayment be extended?

    Generally, the loan recipient (that is, the shareholder or their associate) must apply to the Commissioner to exercise his discretion to disregard the deemed dividend and extend the time in which to make the minimum yearly repayment.

    The application would normally be in writing and include all the information necessary for the Commissioner to make a decision. There is no prescribed or standard application form.

    In making the decision, the Commissioner must have regard to the nature of the circumstances that were beyond your control and any other matters that the Commissioner considers relevant.

    The Commissioner may decide in writing that the deemed dividend should be disregarded if you pay the private company or trustee the amount of the shortfall within a specified time.

    The exercise of the discretion only applies to the amount of the shortfall for that amalgamated loan in that particular income year. If the circumstances persist and affect your ability to meet minimum yearly loan repayments in subsequent income years then you will need to apply in each of those years for the Commissioner to exercise his discretion.

    (See section 109RD.)

    72. What is the effect of extending the period for making a minimum yearly repayment?

    A deemed dividend is not taken to arise because of the failure to make the minimum yearly repayment.

    The Commissioner may specify a time by which the shortfall should be paid. If the amount is not paid within the specified time then a deemed dividend will be taken to arise at the end of the income year in which the shortfall occurred. The amount of the dividend will be the shortfall amount.

    (See section 109RD.)

    73. How do you determine if the minimum yearly repayment has been made?

    To determine if the minimum yearly repayment has been made on an amalgamated loan in a particular income year, it is necessary to compare it with the total amount of payments (principal and interest) made on any of the underlying loans during that year which are able to be taken into account.

    The minimum yearly repayment has been made when the total amount of payments made during the income year equals or exceeds the minimum yearly repayment amount for that year.

    In determining whether the minimum yearly repayment has been made in the income year after the year in which the amalgamated loan was taken to have been made, all repayments made during that year are taken into account including those payments made before the private company's lodgment day for the previous year of income.

    (See subsection 109E(4) and section 109R.)

    74. What if the interest rate in the loan agreement exceeds the benchmark rate?

    The minimum yearly repayment is calculated using the benchmark interest rate, not the actual interest rate in the agreement. However, assessable income and allowable deductions will be calculated using the actual interest rate in the agreement.

    (See subsections 109E(6) and (7).)

    75. In what circumstances can the Commissioner disregard a failure to make a minimum yearly repayment?

    The Commissioner may disregard a failure to make a minimum yearly repayment under section 109E if satisfied that the failure was due to circumstances beyond the shareholder or shareholder associate's control, and the inclusion of the deemed dividend in the shareholder or shareholder's associate's assessable income would cause undue hardship.

    In deciding whether to disregard the failure to make a minimum yearly repayment, the Commissioner must have regard to:

    • the shareholder or shareholder's associate's capacity to repay the loan at the end of the income year in which the loan was made
    • any circumstances that reduced the shareholder or shareholder's associate's capacity to repay the loan
    • whether the shareholder or shareholder's associate took all reasonable steps to make repayments equal to the minimum yearly repayment, and
    • whether the shareholder or shareholder's associate paid the amount outstanding on the minimum yearly repayment as soon as possible after the end of the year the failure occurred.

    This discretion might be exercised if a shareholder or shareholder's associate is in severe financial distress. An example is where the shareholder or shareholder's associate has been involuntarily retrenched from their employment.

    A request for the exercise of the Commissioner's discretion to disregard the requirement to make a minimum yearly repayment may be lodged with the Commissioner at any time. Before any exercise of the discretion, any return lodged in respect of a year in which the minimum yearly repayment was not made would have to be prepared on the basis that the amalgamated loan is treated as a dividend.

    The Commissioner may extend the period for repayments of amalgamated loans where the failure to make the minimum yearly repayment arose because of circumstances beyond the shareholder or shareholder's associates control. See questions 70 to 72.

    The Commissioner also has a discretion to disregard a deemed dividend, subject to conditions being complied with, or allow the deemed dividend to be franked if the dividend arose because of an honest mistake or inadvertent omission. See questions 17 to 22.

    (See sections 109Q, 109RB and 109RD.)

    76. How should accounting records be maintained to help comply with Division 7A in respect of amalgamated loans?

    It is suggested that separate accounts be maintained for each group of loans that have the same maximum term for the purposes of subsection 109N(3) and which were made by the same 'lender' in the same income year to a particular shareholder or shareholder's associate (that is, for each amalgamated loan).

    For example, ABCD Pty Ltd should record all loans made to shareholder MD during the year ended 30 June 2005 that have a maximum term of seven years in one account, and all loans made to MD in the same income year but with a maximum term of 25 years in a second account. If ABCD Pty Ltd also made a loan to MD's associate in the year ended 30 June 2005, this loan should be recorded in a third account.

    This is suggested to enable the 'lender' to:

    • readily identify the loans that form an amalgamated loan
    • correctly calculate the amounts paid to the 'lender' during the income year for each amalgamated loan, so that the 'lender' can determine whether the amalgamated loan was fully repaid or the minimum yearly repayment was made, and
    • calculate the unpaid amount of each amalgamated loan so that it can be applied to the formula for calculating the amount of the minimum yearly repayment.

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

    (See subsections 109E(2) and 109E(3).)

    77. Is the 'lender' required to include the interest component of loan repayments in its assessable income?

    Yes. The 'lender' must include in its assessable income that part of any loan repayments that represent interest under the terms of the loan agreement.

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

    (See section 6-5 of the ITAA 1997.)

      Last modified: 14 Sep 2010QC 16852