It is not uncommon for businesses to provide loans to shareholders or associates of a company. However, business owners should know the conditions that their loan must satisfy under Division 7A, to avoid the amount being deemed a dividend.
Written agreement
Division 7A loan agreements need to be made under a written agreement before the private company's lodgement date. As a minimum, the written agreement should:
Minimum interest rate
Loans must have an interest rate greater than or equal to the annual benchmark interest rate outlined in Division 7A. The benchmark interest rate for 2020 is 5.37% and will be 4.52% in 2021. This interest rate needs to be applied for each year after the year in which the loan was made.
Maximum term
The maximum term for a loan agreement is seven years. If the loan is secured by a registered mortgage over real property, the maximum term is 25 years. For this maximum term, the market value of the property (not including any other liabilities for securing the property prior to the loan) must also be at least 110% of the amount of the lo
Refinancing loans
From the 2007 income year onwards, loans that can be refinanced without resulting in a deemed dividend include:
If these loan conditions are not met, Division 7A of the Income Assessment Act 1936 applies and the loan is deemed a dividend. This dividend is treated as taxable income and the company receives no tax deductions for its loan to you or your shareholders.
