6 Points to Understand When Using a Division 7A Loan Agreement

legalvision
April 18, 2013

(Australian Law) A loan agreement is an agreement between two parties whereby one party (usually referred to as the ‘lender’) agrees to provide a loan to the other party (usually referred to as the ‘borrower’).

A Division 7A loan agreement is a special type of loan agreement. Set out below are 6 essential points to understand about Division 7A loan agreements.

1. Division 7A of the Income Tax Assessment Act 1936 (Cth) only applies to private (proprietary limited) companies, not public companies.
2. Both payments and loans made, and debts forgiven, can be caught by Division 7A.
3. Division 7A captures loans and debts involving a company and its shareholders or their associates (e.g. relatives, related companies).
4. Where Division 7A applies, in the absence of a Division 7A loan agreement the recipient will have to pay tax upfront as the relevant amount of the loan or debt will be treated as assessable income of the recipient in the year in which it is received.
5. A Division 7A loan agreement must comply with the provisions of Division 7A of the Income Tax Assessment Act 1936 (Cth). For example, it must provide for repayments of interest and principal and the interest rate is determined by legislation.
6. Division 7A generally applies to loans and payments made on or after 4 December 1997. However, if a loan or payment was made before that date and is subsequently varied or forgiven after that date then Division 7A may apply from the date of variation or forgiveness.
More information on Division 7A of the Income Tax Assessment Act 1936 (Cth) is available from the Australian Taxation Office (ATO).
LegalVision provides customised Australian legal document templates, legal forms and legal solutions to Australian businesses and individuals. See legalvision.com.au for a Division 7A Loan Agreement.