78. What types of loan repayments will be taken into account when calculating how much of a loan has been repaid or whether the minimum yearly repayment has been made?
All types of repayments are taken into account unless a reasonable person would conclude that, when the payment was made, the borrower intended to obtain another loan from the private company or trustee of an amount similar to or larger than the payment.
This is intended to prevent shareholders or associates of shareholders from avoiding the operation of Division 7A by temporarily repaying a loan.
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.
Notwithstanding the above exclusions, some types of payments will always be taken into account. They include payments made by setting off against the loan amount payable:
- a dividend payable to the shareholder by the private company
- certain private company withholding payments (see question 80), and
- a transfer of property, where the amount of the repayment is the difference between the arm's length value of the property transferred to the private company or trustee and any consideration provided by the private company or trustee for the property.
Also, a payment made to the private company by a third party on behalf of the borrower will always be taken into account as a repayment. This is provided the amount is owed by the third party to the borrower and is assessable income of the borrower for the income year in which the payment is made or an earlier income year.
A private company loan can also be refinanced in certain circumstances - see below.
(See subsections 109R(2), 109R(3) and 109R(4), 109R(5), 109R(6) and109R(7).)
79. What loans can be refinanced without triggering a deemed dividend?
Some loan repayments are not taken into account for the purpose of working out how much of a loan has been repaid. This is intended to prevent shareholders or associates of shareholders from avoiding the operation of Division 7A by temporarily repaying a loan.
Division 7A allows refinancing of certain loans. The law was amended with effect from income years in which 1 July 2006 occurred such that:
- A private company loan can be refinanced when the loan becomes subordinated to another loan from another entity (for example, bank), and the refinancing of the private company loan to the shareholder or shareholder's associate takes place because of that subordination. The subordination must arise as a result of circumstances beyond the control of the entity to which the original loan was made. The private company and the other entity must have dealt with each other at arm's length in relation to the subordination.
- An unsecured loan can be refinanced or converted to a loan secured by a mortgage over real property with a longer maximum term.
- A loan secured with a mortgage over real property can be refinanced with an unsecured loan.
Where there is a refinancing, there are special rules that may limit the maximum term for section 109N purposes. See question 46 (Loans made under written agreements).
(See section 109N, subsections 109R(2), 109R(3), 109R(4), 109R(5), 109R(6) and 109R(7).)
80. What types of withholding payments are always treated as repayments of company loans?
The types of company withholding payments that are always treated as repayments of company loans, even if subsection 109R(2) would otherwise apply, are those made by setting off against the loan amount payable:
- payments from which an amount must be withheld under a provision of Subdivision 12-B, 12-C or 12-D in Schedule 1 to the Taxation Administration Act 1953 (TAA) (even if the amount is not withheld). This covers payments to employees and company directors, payments to office holders, return to work payments, payments where there is a voluntary agreement to withhold, payments under labour hire arrangements, payments of pensions and annuities, eligible termination payments, payments for unused leave, benefit payments, compensation payments and payments specified in the regulations
- amounts included in a person's assessable income under section 86-15 of the ITAA 1997 for an amount which must be paid under Division 13 in Schedule 1 to the TAA (even if the amount is not paid). This covers alienated personal services income received by personal services entities, and
- non-cash benefits for which the provider of the benefit must pay an amount to the Commissioner under Division 14 in Schedule 1 to the TAA (even if the amount is not paid).
(See paragraphs 109R(3)(b) and (ba), the definition of 'work and income support related withholding payments and benefits' in section 109ZD, and section 221A.)