The Government proposes to change the current rules relating to loans from companies to their shareholders and associates. Loans from such companies are a common alternative to shareholders withdrawing profits in the form of taxable dividends.
A loan from a private company is subject to strict requirements under Division 7A of the tax law. That Division requires the loan to be documented and to have specific terms. Failure to do so causes the amount of the loan to be a taxable dividend.
The proposed changes are:
These amendments are expected to apply from 1 July 2019.
Under the new rules, Division 7A loans will have a maximum term of 10 years with a variable interest rate and payments of both principal and interest in each year. The Government says that the new ten-year model will be simpler than the current apportionment model and will be more closely aligned to commercial practice for principal and interest loans.
Currently, the rules allow Division 7A loans to have a maximum term that must not exceed:
The current benchmark interest rate is defined as the ‘Bank variable housing loans interest rate’ published by the Reserve Bank (5.20% for 2018-19).
The new rules will be as follows:
Existing 7 and 25 year loans will be transitioned to the new 10 year loan model under following rules:
When Division 7A was enacted to apply to loans made by private companies from 4 December 1997, loans made prior to that date were mostly unaffected by the then new law. The grandfathering of these loans will effectively cease with the proposed new rules.
Shareholders of private companies will have until the lodgement day of the 2020-21 company tax return to either pay out the amount of those loans or put in place a complying loan agreement; if either of those events does not occur, the loan will be treated as a taxable dividend of the borrower shareholder in the 2020-21 income year. The first repayment will be due in the 2021-22 income year.
For any questions or to discuss any of the above in relation to your personal situation, please contact Grantley Stevens or your Nexia Edwards Marshall Adviser.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.