Division 7A loan question

Discussion in 'Accounting & Tax' started by tommyjay, 23rd Jun, 2023.

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  1. tommyjay

    tommyjay Member

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    Question regarding the actual admin for amalgamated loans for Div7A.

    Scenario:

    1 July 2023 - Bucket company lends 100k to Family Trust (bucket company is a beneficiary of the Trust).
    1 Aug 2023 - Bucket company is entitled to 50k of the Family Trust income for FY22 (Trustee becomes aware of what the actual amount is by this date.)

    30 June 2024 - Family Trust t'tee decides to take the UPE route for the FY23 trust distribution and does not repay the 100k i.e. Div 7A arises

    Both the 100k and 50k will require Div 7A loans in place before the Bucket Company/Trust lodge their FY24 tax return in May 2025 but do they need separate loan agreements for each or a single loan agreement for 150k for total borrowings over FY24?
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It sounds like they are debts to each entity so would require separate loan agreements if the $50k wasn’t used to reduce the debt of the company. seek you own legal advice though
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    D7a involves more than loan documents. Minimum repayments interest etc.
     
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  4. tommyjay

    tommyjay Member

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    Thanks Terry but in this case the borrower and lender are unchanged and the borrowing happens in the same income year (just at different times within the income year) as such the terms for the loan repayment would be exactly the same. Hence why I'm still unclear why you'd need separate loan agreements.
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Division 7A prescribes a loan under a written agreement. The wording may be specific to a event or may be revolving facility. If an agreed loan is discharged the old agreemnet may not cover a new loan.

    There are matters your tax adviser should be able to guide.
     
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  6. tommyjay

    tommyjay Member

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    Sorry Paul I just realised the confusion may have arisen because I mucked up the dates/periods in my original question! I've just fixed it and provided a bit more context, hope that's helpful.

    Scenario:

    1 July 2023 - Bucket company BC Pty Ltd lends 100k to Simpson Family Trust (BC Pty Ltd is a beneficiary of Simpsons Family Trust and the directors of BC Pty Ltd i.e. related parties).

    1 Aug 2023 - BC Pty Ltd is entitled to 50k of the Simpson Family Trust income for FY23 i.e. year ending 30 June 2023

    15 May 2024 - Due date for FY23 tax return for both company and trust. Trust has not paid out the 50k income to bucket company (UPE event so Div7A loan will be required for 50k)

    1 July 2024 - Trust did not repay the 100k loan to bucket company by 30 June 2024 so a Div7A loan will be required for 100k.

    Prior to the FY24 tax lodgement for both the company and trust, loan agreement(s) need to be set up for the 50k UPE and 100k loan. Can this be done in the same agreement i.e. loan principal as 150k since all other terms are the same or because they are different events i.e. UPE vs related party borrowing that they need to be two agreements?

    Thanks Paul so would a revolving facility type agreement cover off all future UPE's and related party borrowings (assuming same borrower and lender)?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Where the moneys lent on the same day?
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    IDK. I havent seen what was agreed. There is also a requiremnet for interest and repayment mins to be met. Amalgamated loans or distinct loans ?? I would argue there are sound merits for two D7a agreements specific to the issues and also distinct accounting for each arrangemnet in all entities. Otherwise how can you repay one v other etc.
     
  9. tommyjay

    tommyjay Member

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    My understanding was Div 7A is all about total loans in a given income year - less so about when in the year they happen. In this case both loans originate same year so hence accounting it as 1 loan of 150k or 2 loans of 100k and 50k makes no difference from repayment perspective.

    Perhaps this might have been a mistaken assumption on my part
     
  10. tommyjay

    tommyjay Member

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    I understand that Div7A loans are quite specific re min repayments, benchmark rates etc. but if both loans originate in the same year, have the same borrower and lender, then mathematically repaying a 150k loan under the same terms equates to the same as repaying 100k and 50k loan individually? Also the P&L/Balance sheet impact is also the same - except in one case you're having two line items under liabilities and the other just one.

    I guess my query is do amalgamated loans in the same income year require separate agreements/record keeping for each constituent loan?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    what does your written agreement say?
     
  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Not sure what that refers to. A Div7A loan cant have that as a feature. No loan can.

    I would consider what the agreemnet says. A good agreemnet may consider a facility of $150K