Loans which meet the following criteria are not treated as dividends in the year the loan is made:
- The loan must be made under a written agreement.
- The rate of interest payable on the loan must be equal to or exceed the bank variable housing loan interest rate last published by the Reserve Bank of Australia before the start of the income year in which the loan was made.
- If the loan is secured by a registered mortgage over real property, the term of the loan must be no more than
- 25 years and the amount of the loan must not exceed 91% of the value of the property over which the security is provided - less any other liabilities for which the property also provides security.
- For all other loans, the term of the loan must be no more than seven years.
The relevant provisions require that the written agreement be in place before any amount is advanced to the shareholder or associate. However, for loans made during the 1997-98 income year, this requirement will be satisfied if the written agreement was put in place by 30 June 1998.
All loans made during a year which are not treated as dividends at the end of the year and which have the same maximum term are, for tax purposes, amalgamated to form a single loan. Shareholders or their associates are required to make a minimum yearly repayment in respect of that amalgamated loan. The minimum repayment is calculated by using the formula set out in the legislation. A failure to make such a repayment will result in the outstanding amount of the loan being treated as a deemed dividend to the extent of the private company's distributable surplus.
Example
A private company made an unsecured loan to a shareholder on 1 July 2002. The loan was made under a written agreement which specified that the rate of interest payable for all future years must equal or exceed the benchmark interest rate for the year. For 2003-04 the benchmark interest rate was 6.55% per annum.
The term of the loan is five years. For the year ended 30 June 2003, as it met the criteria for minimum interest rate and maximum term, the loan is not treated as a dividend.
If the amount of the loan not repaid at 30 June 2003 was $100,000, the minimum yearly repayment required for the 2003-04 income year is calculated as follows:
Excluded loans example - basic formula
If repayments made in the 2003-04 income year equal or exceed the minimum yearly repayment, the amount of the loan not repaid at the end of the income year is not taken to be a dividend.
End of example