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Small business turnover carveout for at call loans between connected entities

Last updated 15 April 2018

If a company has a turnover of less than $20 million, there is a carve-out which means that related party ‘at call’ loans will be treated as being debt interests rather than equity interests.

A company's annual turnover (worked out at the end of an income year) is to be determined in accordance with subsection 188-10(2) of the Goods and Services Tax (GST) Act 1999. This test is already used by small companies for GST purposes.

Private companies with related party 'at call' loans that do not qualify for debt treatment may change their loans so they are debt interests under the debt/equity rules. Taxpayers may elect to treat this change as if it occurred at the beginning of the previous income year. This election must be made before the earlier of the due date for the company's tax return or the date of actual lodgment for that year.

Because the turnover test applies on an annual basis, a company may qualify for deemed debt treatment under the debt/equity rules for one year but not the next. This means that related party 'at call' loans to the company could change from being debt interests to being equity interests if their turnover exceeds $20 million.

QC36047