Div 7A Loan Agreement Requirements

If, in the previous year, the loan is granted as a result of the liquidation of a business, the amount considered a dividend is the amount of the loan that was not repaid at the end of the current performance year. A loan to a shareholder or his partner as an employee or employee of the private company does not result in tax on ancillary benefits, whether it is a compliant loan or a dividend of Division 7A. Example 4 – Loan agreed in writing before the date of collective bargaining If the actual interest rate used in the written agreement exceeds the reference rate, the “loan amount remaining at the end of the previous income year” is a fictitious amount. Like the common approach, we assume that none of the initial $700,000 raised from the business is available. As a result, the client finances the tax debt of $165,000 through a one-time loan from the bank. The result is an annual interest cost of $11,550 (or 165,000 x 7%), which is $69,300 per table 1 until April 2020. The $165,000 debt will then be repaid to the bank on that date. We have now measured the cost of bank interest until April 2020. This corresponds to the timetable for managing the Div 7A loan as part of the common approach, which allows for a relevant comparison. The Division 7A computer and the decision instrument can be used to calculate the minimum annual repayment of the principal and interest required to repay the merged loan over its maximum term. There is no mandatory form for the written agreement.

However, the agreement should at least identify the parties, define the essential terms of the loan (i.e. the amount and duration of the loan, the obligation to repay and the interest rate payable) and be signed and dated by the parties. Borrowing interest must be included in the lender`s income for the year. A loan made as part of an agreement written before the date of liability of the private company and which meets the minimum interest rate and the criteria of maximum duration is not considered a dividend during the year of loan return.