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 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.
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?