Australia: Guide on how to avoid unexpected tax consequences in relation to “Division 7A” loan repayments
Loans from a private company to shareholders or associates must be either repaid in full or placed on a Division 7A complying loan agreement
Loans from a private company to shareholders or associates
The Australian Taxation Office (ATO) issued a guide on how to avoid unexpected tax consequences in relation to “Division 7A” loan repayments.
According to the ATO, loans from a private company to its shareholders or their associates must be either repaid in full or placed on a Division 7A complying loan agreement before the company’s filing day to avoid an unfranked dividend under Division 7A.
Under complying loan agreements, minimum yearly repayments (MYRs) comprising of interest and principal must be made each year, starting from the income year after the loan is made. A shortfall in the loan’s MYR could be assessed to the borrower as an unfranked dividend.
The ATO advises that when making MYRs, borrowers need to:
- Start repayments in the income year after the complying loan was made
- Use the correct benchmark interest rate to calculate the MYR for the current year
- Make their required payments on the loan by the due date (i.e., the end of the income year (usually 30 June))
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