As a business owner, you may have heard of a Division 7A loan facility agreement. It is a type of loan that is available to shareholders in a private company. This loan facility agreement falls under the purview of the Australian Taxation Office (ATO) and is subject to certain rules and regulations.
What is Division 7A?
Division 7A is a part of the Income Tax Assessment Act 1936 (ITAA 1936), which lays down the rules for taxing dividends distributed by private companies. The aim of Division 7A is to prevent shareholders and their associates from receiving tax-free benefits or advantaged loans that would otherwise be subject to tax if paid as wages or dividends.
What is a Division 7A loan facility agreement?
A Division 7A loan facility agreement refers to an agreement between a company and its shareholders, where the company provides a loan to the shareholder or their associate. This loan can be used for any purpose, such as financing personal expenses, purchasing assets, or investing in other businesses.
However, the loan facility agreement must comply with the rules and regulations laid down in Division 7A. Failure to do so may result in the loan being deemed a dividend, and the shareholder being subject to tax on the amount of the loan.
How does a Division 7A loan facility agreement work?
To use a Division 7A loan facility agreement, a private company must have sufficient retained earnings to lend to its shareholders. The loan must be repaid within a set timeframe, usually 10 years, and must include a minimum repayment amount each year.
The interest rate on the loan must also be set at the ATO’s benchmark rate, which changes regularly. If the company charges a lower interest rate, the difference may be deemed a dividend and subject to tax in the hands of the shareholder.
What are the benefits of a Division 7A loan facility agreement?
One of the main benefits of a Division 7A loan facility agreement is that it allows shareholders to access funds without having to pay tax on the loan. This can be particularly useful for business owners who need to finance personal expenses or invest in other businesses.
Another benefit is that the loan funds remain within the company, which can help to improve cash flow and provide a source of income for the business.
Overall, a Division 7A loan facility agreement can be a useful tool for business owners looking to access funds without paying tax on the loan. However, it is important to comply with the rules and regulations laid down by the ATO to avoid any potential tax liabilities. If you are considering using a Division 7A loan facility agreement, it is recommended that you seek advice from a tax professional or financial advisor.