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I borrowed money from my company – Is it a loan?

Written by Peter Carter • Senior Accountant
Published on 05 Jun 2019

When you draw more money out than you have declared as either salary and wages or dividends then you have borrowed from the company.

If you don’t repay this money before the due date of lodgement for the company, then the ATO can deem the additional drawings as a deemed dividend and include this in your assessable income.

You can avoid this by drawing up a formal loan contract between the person who borrowed the money and the company. The loan agreement wording should be drafted in a way that meets the ATO’s guidelines for both the interest rate and time to repay. (Section 109N of the Income-tax assessment act 1936)

Currently, the ATO Benchmark interest rate is 5.20% for the 2018/19 year.

The maximum time for repayment is 25 years if the loan is secured by a registered mortgage over real property and the LVR must not be more than 90% of the net asset. All other loans are over 7 years.

The amount of the loan Is capped at the distributable surplus amount of the company at the time of the loan being drawn.

 

Changes are coming

22/10/18 the Federal Government released proposed changes to the operation of Div 7A loans. These changes were supposed to take effect 1/7/19 but have been further delayed until the federal government irons out some of the issues raised during a consultation with the public.

The changes, in brief, are as follows

  • Change the benchmark interest rate to match the banking industry overdraft rate instead of a housing rate. This will be about 3% higher than the current rate
  • A maximum 10-year loan term for all loans with no option to extend. This will replace the 7 years and 25-year loan term.
  • No Requirement for a formal loan agreement to be in writing. However, there will be a requirement to show in writing that a loan was entered into addressing the following
    • Parties to the loan
    • The agreement that the loan be made.
    • The loan terms. The amount, start date, the requirement to repay the loan, the term of the loan and interest rate payable.
  • Yearly repayment amounts must be both principal and interest. The repayment is generally the same for each year with the new legislation requiring interest to be calculated for the last year as well.
  • Any shortfall on the minimum repayment will be a deemed dividend

Should you wish to discuss the potential tax issues related to this provision please call one of our staff.

Check out another recent blog in this category.

Peter is a Certified Practicing Accountant (CPA) and has completed an Advanced Diploma in Accounting and Bachelor of Commerce (Accounting and Finance Law). Peter has worked with Fitzpatrick Group since July 2002. Authour • Peter Carter

Senior Accountant, Fitzpatrick Group

Post Categories: Small Business | Tax Essentials

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