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Directors Loans

What the hell is a Div7a loan?!

You will hear me talk about this a lot. This is one of the key areas that the ATO are currently focussing on, especially with the recent court decisions on unpaid present entitlements (UPE's).

A directors loan, otherwise called a debit loan, a Division 7a or div7a loan after the section of the act (It's a riveting read 😂) is where a director, shareholder or an associate take a loan from a company.

NOTE: This is not a person lending money to a company, only from the company to an associate.

It's perfectly fine for a director or one of their associates (partner, children etc) take a loan from the company. For us, we need to make sure we have the paperwork in order for the loan to be a complying loan.

We also need to look at loans between related companies. The ATO is also scrutinising these to ensure that it is a complying div7a loan. In the past, we would consider these commercial loans and wouldn't fall under Division 7a, however the ATO does not take this view. I take the opinion that it is better to have something in place rather than nothing, so please ensure these types of loan comply with division 7a.

Lastly, the most complicated part of div7a loans, and the thing that is currently been fought in court, is UPE's. Basically this is where a distribution from a trust is declared but not paid.

If there was a distribution declared from a trust to a company, the ATO is of the opinion that this is a div7a loan, and the proper paperwork needs to be in order to be a complying loan.

So what is the consequence of a non-complying loan? It ain't pretty! The loan will become a deemed dividend with no franking credits attached. This effectively means that the client pays tax twice on the profits (maybe not twice, but I'm not a mathematician). This is bad!

You may ask why we have to do this. Well , you can thank Kerry Packer for this. Remember this gem?

How do I ensure the loan is compliant?

  1. Determine the amount of the loan
  2. Complete the Loan Schedule
  3. Complete the Loan Agreement
  4. Ensure Minimum repayments are made each year (per the loan schedule)

Key features of a Division 7a Loan

  1. No repayments in the first year
  2. No interest in the first year
  3. Can be repaid via a dividend
  4. Interest is revenue to the company
  5. Interest can be deductible if the loan is for investment purposes