Division 7A of the Income tax Assessment Act (ITAA36)
It is common knowledge that where a private company makes a loan to a shareholder or their associate a potential deemed dividend issue arises under Division 7A. The shareholder has until the due date of lodgement of the tax return to repay the loan in full or enter into a loan agreement.
If a loan agreement is entered into, the taxpayer has until the end of the first year after the year the loan was made to make a repayment.
The minimum yearly repayment is calculated on the balance of the loan using the benchmark interest rate and the term of the loan. However, where the loan has a payment made prior to lodgement day then the interest is pro rata’d. In addition, the payment made before the lodgement date does not count towards the minimum yearly repayment
Example
Reducing loan balance for pre-lodgment day payment.
On 15 august 2009, Viking Pty Ltd made a $100,000 loan to Annie, a shareholder in the company. The loan was made pursuant to a loan agreement that satisfied the requirements of S.109N Annie had made no repayments as of 30 June 2010.
However, she repays $25,000 on the 15 December 2010 which is prior to the company’s lodgment day of 1 March 2011.
What is the closing balance of Annie’s loan as at 30th June 2010?
Because S.109E(3) allows the $25,000 to be taken into account, the closing balance of the loan as at 30June 2010 is not the $100,000 she originally borrowed but $75,000 (ie, $100,000 – $25,000)
What is the MYR that Annie must make by 30th June 2011
Based on the closing balance of the loan and the other variables contained in the formula in S.109E(6) the MYR is $14,1111. However, if the MYR were based on $100,000 it would be $18,815. Note that the benchmark interest rate for 2011 is 7.4% p.a.
Example
Correctly calculating interest in year two of the loan
Valerie is a shareholder in Aromas Pty Ltd the company’s lodgement day for the 2010 tax return is 1st March 2011. The following loan transactions occur.
Date Transaction DR CR Balance
1st Aug 2009 Loan To Valerie $50,000 $50,000
1st Sep 2010 Repayment $10,000 $40,000
1st June 2011 Repayment $5,000 $35,000
30th June 2011 Interest $3,055 $38,055
What amount if the MYR for 2011 based on?
$40,000. The $10,000 repayment on 1 September 2010 is counted as it was made before ‘lodgment day’ the MYR is $7,526.
Has Valerie made the MYR?
YES. Both the $10,000 and $5,000 repayments made by Valerie during the 2011 year are taken into account. As the total payment of $15,000 exceeds $7,526 the MYR is covered.
What is the closing balance of the loan for the 2011 year?
To work this out it is necessary to calculate the interest charge for the year. Note, interest does not begin to accrue until 1st July 2010. The benchmark interest rate is 7.4% p.a which is 0.020273973% per day.
When do the new dividend rules apply from?
The rewritten s.254T applies to all dividends declared on or after 28th June 2010, it will not apply to dividends declared before this time but paid on or after 8th June 2010.
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