Division 7A of the Income Tax Assessment Act of 1936 treats three specific types of payments made by a corporation to shareholders or associates of shareholders as a dividend, and therefore taxable income. These include direct payments to a shareholder or close associate, a loan given to said individual from the company’s profits, and the forgiveness of a debt owed to the company by a shareholder. As with most tax laws there are exceptions and some exemptions at the discretion of the commissioner. The safest way for an individual to avoid the tax liability of such a loan is to have a Division 7A loan agreement in place before the loan is made.
A Division 7A loan agreement allows for a shareholder or close associate to borrow money from the company without having to count the loan as income. In order to avoid the tax liability the written agreement must be in place before the loan is made and the loan must meet certain interest and term criteria. The interest charged must be at least equal to the Indicator rate set by the Australian reserve bank. The term is limited to 7 years unless the loan is secured by real property with an equitable value of 110 percent of the amount borrowed, in which case the loan term may be extended to 25 years.
Even if you’ve used a Division 7A Loan Agreement, the loan may still be counted as a dividend at any point in the future if yearly minimum repayments are not met. It is possible to find a Division 7A Loan Agreement online, in particular websites like LegalVision actually offer customised legal documents. It can also be a good idea to seek the help of a professional legal services provider to assure the terms of your Division 7A Loan Agreement meet the necessary criteria. Companies such as LegalVision provide customised templates as well as legal services from trained professionals assuring the borrower that the loan agreement qualifies them for the tax exemption prior to submission. The fees charged for such legal services are negligible when compared to the taxes an individual or company will be liable for should any aspect of the loan or repayment fail to meet the legal criteria.
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