There are also benefits if the company is placed into liquidation as the lender will be a creditor that can vote at creditor’s meetings.
These benefits only happen if then loan is correctly set up – which means it needs to comply with division 7A of the Tax Act.Division 7A of the Income Tax Assessment Act 1936 (“ITAA”) applies to shareholders or shareholders’ associates dealing with assets of a private company.
Its provisions generally apply in the event a private company makes tax-free distributions such as payments, loans or debts forgiven to shareholders or shareholders’ associates.For the individuals and entities entering into such transactions, care must be taken to ensure that they are in strict compliance with the requirements of Division 7A. They otherwise risk the ATO determining such transactions as deemed franking dividends, arising at the end of the financial year in which the transaction occurs.In June, the Australian Taxation Office released several draft tax rulings and determinations affecting the application of the Division 7A provisions.
Implications of the draft tax rulings and determinations are as follows:
- Draft TR 2015/D2:
Where a related beneficiary has an unpaid present entitlement to receive an amount of income or capital from a trust, the value of the unpaid present entitlement will be included once, and once only, in determining whether or not that trust satisfies the maximum net asset value test for the purpose of the small business CGT concession. - Draft TD 2015/D4:
The release by a private company of its unpaid present entitlement is considered a “payment” within the meaning of Division 7A of the ITAA. Accordingly, it could be a deemed dividend under section 109C(3)(b) of the ITAA. - Draft TD 2015/D5:
A beneficiary is not entitled to a deduction under section 25-35 of the ITAA for the amount of an unpaid present entitlement to trust income that the beneficiary has written off as bad debt.
Furthermore, the Div 7A interest rate is 5.45% for 2015-2016. This is a decrease from the 5.95% rate in the 2014-2015 tax year.
Each taxpayer’s circumstances differ and you should seek advice specific to you before taking any action. Contact Irish Bentley to ensure that your loan transactions are in compliance and to assist in this complex area.