Tax Tip 158: Borrowing Money from a Related Company (Div7A)

Tax Tips: Borrowing Money from a Related Company (Div7A)


In the good old days people used to set up a company and use this to invest or conduct a business. The company would pay tax at 30%. The individuals behind the company would try to cap their income at 30% by reducing the amount they take as wages. They would then borrow money from the company to use for personal expenses. They would never make any repayments and never give that money back to the company. The company would eventually write of the debt as unrecoverable.


Naturally the government didn’t like this once it became too popular as it eroded the amount of tax collected. So new sections were inserting into the 1936 tax act – the ITAAA36. This came under a new division which is known as “Division 7A”.


Division 7A basically introduced laws which say that if a shareholder, or an associate of a shareholder borrows money from a company this loan will be treated as if it was a dividend paid to them by the company unless a written loan agreement is entered into with specific requirements – the loan would be a deemed dividend.


The laws were toughened up to capture loans from related trusts too in some situations. If a loan has made an unpaid distribution to a company, a UPE, and this trust lends money to an associate of the company then this loan could be a UPE.


Division 7A is extremely complex – so complex that there is at least one book written on this topic –and it is about 300 pages long too.


Check out the legislation at INCOME TAX ASSESSMENT ACT 1936

Section 109B onwards up to 109XI


Example

Bart has set up a company which runs a business. His sister Lisa is the shareholder and Bart is the director.

The company makes a nice profit and Bart causes the company to lend $100,000 to his dad Homer at 0% interest. Homer parks that money in his offset account.

The ATO does an audit and taxes Homer on that $100,000 as if it was a dividend payment.

 

Division 7a isnt the big bad bogeyman everyone thinks it is.

1. must have a complying loan agreement in place before the earlier of the lodgement date or due date for lodgement if the loan hasnt been repaid
2. no need for interest calculations or minimum repayments to be remade the first period the loan is taken out.
3. if unsecured minimum loan repayments can be spread over 7 years. if with a registered mortgage over 25 years

can actually be a tax planning tool.

 

And the interest may even be deductible too if borrowing to invest etc.

 

I thought this thread was very interesting and like to reactivate. My enquires suggest deductible Div7a loan (say between Corp and individual) may be for refinance of existing debt (underpinning existing investment) or for new investments as long as it’s on an arms length basis. Any thoughts?

 

Div 7A covers loans from companies to individuals related to the company. The loan could be for any purpose -refinance, new investment, lifestyle, to buy underwear etc.

 

Sure. The key requirements of the security and loan term etc all must be met and the loan terms must be diligently complied with. The minimum Div 7A rate isnt exactly appealing however (5.2%) BUT it does open up some strategies beyond the normal loan market. I have a few clients who have specific borrowings compliant with D7A. These D7A loans are for the deposits and duties etc and the main stream lenders provide the other 80%.

Care should be taken that you dont create a debt monster and endlessly borrow this way. Lenders look at financials and can be alarmed by debit loans and the impact on their credit risks.

 

Thanks guys.

 

not just loans from companies to individuals. it also includes loans to associates of a shareholder which include trusts.

 

And should add that it can also include loans from trusts where the trust may have a UPE to a company.

 

Here is an interesting case involving an accountant and tax agent, of many years experience:
Abichandani and Commissioner of Taxation (Taxation) [2019] AATA 4296 (1 October 2019)
Abichandani and Commissioner of Taxation (Taxation) [2019] AATA 4296 (1 October 2019)

 

See:

Tax Tip 181: Borrowing Money from Related Trusts and Deemed Dividends Tax Tip 181: Borrowing Money from Related Trusts and Deemed Dividends

 

Where this occurs it will be important to convert the upe to the company into a loan and subdivision EA wont apply

 

Thought i would rehash this thread.

I was talking to an accountant the other day, who said that if you have a bit of cash in a company bank account, that you can pull it out and put it in a personally used offset account for the ppor, and then put it back in the company account before the end of the financial year. He said it doesnt trigger div 7A, and is seen as a loan that is repaid within the financial year and no interest is required to be paid to the company.

For example, bart has a company that has 200k in the co bank account, bart also has a mortgage of 200k that has a linked offset account. On july 1st bart takes the 200k out of the co bank account and puts into his personal ppor offset account. Then on 30 june bart puts back into the co account. Then does again in following year.

The benefit is the money is working for you in the ppor offset account, whereas in the company debit account its potentially earning nothing.

What you guys think of this? Should there be more buffer in the dates of transfer, ie moved in aug and may instead?

 

Read my tax tip on this. Your accountant hasn’t read the legislation. You could do it once perhaps

 

thats an accountant who hasnt understood s109R and has a very poor understanding of div 7a. that strategy doesnt work and such advice is negligent.

 

Here is that tip of mine

Tax Tip 365: Borrow from Company, Repay on 30 June and Reborrow 1 July? Tax Tip 365: Borrow from Company, Repay on 30 June and Reborrow 1 July?