Understanding the Shareholder Loan
For example, if you, as a shareholder or an associate, borrowed from your private company during the year ending 30 June 2024, you’ll find the loan recorded on the company’s balance sheet. It is usually listed as an asset but could sometimes appear as a negative liability (though showing it as an asset is preferred).
Drawings taken from the company are treated as loans. If the amount withdrawn exceeds what is owed to the individual at 30 June, a loan will be recorded, and action is needed to avoid the loan being treated as a deemed dividend.
Tax Implications of Shareholder Loans
If the loan is not fully repaid by the earlier of the company’s tax return lodgement date or its due date, it will be classified as a deemed unfranked dividend for the financial year.
To avoid this, you can enter into a Division 7A complying loan agreement, which allows repayment over:
- A maximum of 7 years on a principal and interest basis.
- 25 years if secured by a mortgage over real property and meeting specific conditions.
Division 7A Loan Agreements
Under a Division 7A loan agreement, the following apply:
- The benchmark interest rate set by the ATO must be charged (8.77% for the year ending 30 June 2025).
- A minimum yearly repayment must be made by 30 June each year.
- Any shortfall in repayment is treated as a deemed unfranked dividend for that year.
Example of Shareholder Loan under a Div7a loan arrangement
Arc Industries Pty Ltd lent $50,000 to its shareholder, Jordan, on 9 May 2022. Unable to repay the loan in full by the tax return lodgement date for the year ending 30 June 2022, Jordan entered into a 7-year Division 7A loan agreement. She is now required to make minimum yearly repayments as follows:
- Year ending 30 June 2023: $8,569 (Interest: $2,383.88, Remaining principal: $43,814.88, Interest rate: 4.77%)
- Year ending 30 June 2024: $9,555 (Interest: $3,613.52, Remaining principal: $37,880.26, Interest rate: 8.27%)
- Year ending 30 June 2025: $9,681 (Interest: $3,319.97, Remaining principal: $31,519, Interest rate: 8.77%)
Repayments for subsequent years depend on future benchmark interest rates. Jordan can also choose to repay the loan faster if she wishes.
Key Considerations
- Tax Planning: Ensure you’re prepared for repayments each 30 June while the loan is outstanding.
- Tax Treatment:
- Interest paid to the company is assessable income for the company.
- Whether you can claim a tax deduction for interest depends on the purpose of the loan. If it’s for income-producing activities, the interest payments are typically deductible.
Don’t let Division 7A compliance catch you off guard! If you need assistance managing this aspect or understanding your tax obligations, connect with our tax accountant team for expert advice.
