Division 7A Loan Agreement
Division 7A Loan Agreement
Perth Commercial & Corporate Lawyers
Are you looking to take out a loan as a shareholder, director or an associate of your private company and require a written loan agreement? West Perth Legal can assist you with drafting a bespoke Division 7A Loan Agreement to document your transaction.
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What is a Division 7A Loan Agreement?
A Division 7A Loan Agreement is a written agreement that documents the loan from a private company to its shareholder or their associate for a particular income year. Having a written agreement is one of the criteria for a loan to be considered a ‘complying loan’ under tax legislation. If the loan is not considered a complying loan, then normal tax obligations apply for that income year.
According to the Australian Tax Office, ‘Division 7A extends the meaning of 'loan' to include:
- an advance of money
- a provision of credit, or any other form of financial accommodation
- a payment for a shareholder or their associate, if they have an obligation to repay the amount whether it's
- on their account
- on their behalf
- at their request
- a transaction (whatever its terms or form) that is the same as a loan of money.
A loan is considered to be made at the time the amount is paid either as an ordinary loan, or if any of the above is done in relation to a shareholder or an associate.’ (ATO)
The maximum term of a loan is generally 7 years. For loans secured by a mortgage over real property, the maximum term is 25 years.
When is the benefit of a Division 7A Loan?
A division 7A loan is commonly used when the company shareholder, director or associate wishes to withdraw money from the company and shift the timing of its tax obligations.
Complying Division 7A Loan Agreement
A division 7A loan agreement should be written. This must be in place before the private company’s lodgement day for the income year in which the loan amount was paid to the shareholder or their associate.
The division 7A loan agreement should identify the parties to the loan, as required by legislation.
The division 7A loan agreement should set out the amount of the loan, and the term of the loan as required by legislation. Depending on whether the term is secured by real property or if the term is not secured, the maximum duration of the loan agreement varies.
The division 7A loan agreement should stipulate the requirement to repay the loan, and the minimum repayments required per year.
The division 7A loan agreement should stipulate the interest rate payable under the loan as required by legislation. The interest rate for each year must at least equal the Division 7A benchmark interest rate, and interest rate is generally updated annually.
The division 7A loan agreement should be appropriately signed and dated by the parties to the loan agreement.
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