• Loans and other forms of credit

    A loan from a private company to a shareholder or their associate may be treated as a Division 7A dividend unless, by the lodgment day, the loan is:

    • a complying loan for Division 7A purposes, or
    • repaid.

    A 'loan' for the purposes of Division 7A includes the provision of credit or any other form of financial accommodation and any transaction that is in substance a loan of money.

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    Complying loan under Division 7A

    All of the following conditions must be satisfied for a loan to be a complying loan and therefore excluded from being a Division 7A dividend:

    • A written loan agreement must be in place before the company's lodgment day for the income year in which the loan amount was paid to the shareholder or associate.
    • The loan interest rate for each year of the loan must at least equal the Division 7A – benchmark interest rate.
    • The term of the loan must not exceed  
      • 25 years if 100% of the loan is secured by a registered mortgage over real property and, when the loan is made, the market value of the property, less the amounts of any other liabilities secured over the property in priority to the loan, is at least 110% of the amount of the loan
      • 7 years for any other loan.

    There is no prescribed format for a written loan agreement. However, as a minimum, the agreement should:

    • identify the lender and borrower
    • set out the essential conditions of the loan (the amount of the loan, the date on which it's drawn down, the requirement to make minimum yearly repayments, the interest rate payable, and the term of the loan), and
    • be signed and dated by the lender.

    Minimum yearly repayment

    Where a loan agreement is made for the purposes of Division 7A, minimum yearly repayments must be made in the subsequent income years. If not fully made in any subsequent income year, the shortfall amount is treated as a Division 7A dividend in that income year.

    To be effective, minimum yearly repayments of loans must be made by 30 June of the income year in which the repayment is due.

    The minimum yearly repayment amount is calculated on the total loans made to a shareholder or associate in the income year for the same term or period, called an 'amalgamated loan'.

    The interest on the loan must be included in the lender's assessable income for the year.

    You may be able to use the Division 7A calculator and decision tool to calculate the minimum yearly repayment required.

    Repayments not taken into account

    Some payments you make to a private company in relation to a loan are not taken into account for the purpose of working out the minimum yearly repayment or how much of the loan has been repaid.

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    Employee loans

    A loan to a shareholder or their associate in their capacity as an employee or an associate of an employee of the private company doesn't give rise to fringe benefits tax irrespective of whether the loan is a complying loan or is treated as a Division 7A dividend.

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    Last modified: 14 May 2015QC 45069