Tax Tip 448: Repayments on a Loan from a Related Company (Div7A)

When borrowing from a related company the repayments back to the company will need to be high to meet the division 7A requirements. Unsecured loans will need to be paid back at principal and interest over 7 years.


Example

Say you borrow $100,000 from a private company in which you own shares. To avoid this being taxed as a $100,000 unfranked dividend you would need to have entered into a Div7A compliant loan agreement, in writing, or pay back the loan in full before the lodgement day. To comply, this would generally mean a 7 year PI loan at 4.52% pa (currently 2022) if an unsecured loan.

Because of the short loan term the repayments will be high. This should be taken into account when borrowing from a related company to invest.

The repayments on such a loan of $100,000 would be:


Minimum yearly repayment: $16,983.00

Benchmark interest rate: 4.52%

Opening balance: Date: 30/06/2021

Interest: $4,520.00

Calculators and tools


This means $12,463 in principle would be paid back in the first year. The interest on the loan could be deductible if the borrower is borrowing to invest, but in the following year the interest will be much lower because so much of the loan amount has been paid back.

 

A lender may also count the heavy repayments towards servicing calcs and its fairly harsh. However if further profits continue that may assist.

At present since Div 7A rates are set just prior tto the financial year the rate of interest doesnt seem to be harsh but towards May 2023 I would expect the rate to see a quite sharp rise

ATO says this is the 'Housing loans; Banks; Variable; Standard; Owner-occupier' rate last published by the Reserve Bank of Australia before the start of the income year. The benchmark interest rate for an income year does not change if the Reserve Bank of Australia later revises its published rate after the start of the income year. Present rate is 4.77% and this could well become 7% (??)