Australia: Guide to manage requirements of “Division 7A” loan

The Australian Taxation Office (ATO) issued a guide to assist taxpayers in correctly managing the requirements of a “Division 7A” loan.

Division 7A can apply to loans, payments, or other benefits when an associate or shareholder accesses money from their private company, which—when not managed correctly—can result in the transfer of funds being treated as an unfranked dividend that results in larger than expected tax bills.

To avoid unexpected tax consequences, the ATO advises taxpayers to place all payments and loans that haven't been repaid on a complying Division 7A loan, with an agreement that must be in place before the company’s tax return filing date.

The Division 7A complying loan agreement must:

• Be in writing before the company's tax return filing day
• Have an interest rate for each year of the loan equal to the Division 7A benchmark interest rate
• Have a maximum term of seven years for an unsecured loan, or 25 years for certain secured loans

The written agreement must also include the identity of the parties, amount of the loan, requirement to repay, and signature of the parties with dates.