To Document or Repay Shareholder Loans – That is the Question?
If you have drawn or loaned funds from your company during the financial year, and such a loan or drawing results in you or an associate owing the company back this money, then be aware of the strict rules that apply under Division 7A of the Tax Act.
It is important to ensure that any amounts that are not repaid to your company by the end of the financial year are properly documented, otherwise a tax liability may be triggered. That is, if such loans or advances are made to company shareholders or their associates (e.g. spouse or in many instances a related entity), they may be deemed as assessable dividends (to the extent that your company has a distributable surplus). This deemed dividend, however, can be converted to a loan, provided the appropriate loan agreement is entered into prior to the company’s “Lodgement Day”. The ‘Lodgement Day’ is the earlier of the due date for lodgement, or the date of lodgment of the private company’s Tax Return – for the income year in which the loan or advance is made. The loan agreement must contain some very specific information as set out in the Tax Act, so ensure you seek professional advice when drafting such agreements.
For agreements that are already in place, ensure that the minimum payment requirements are met by the 30th June and, if not, consider whether undrawn dividends or undrawn director’s fees may be necessary to comply with the legislation.
You will need plenty of time leading up to the 30th June to get these loan documents in place, if you have not already done. So speak to your advisor if you are uncertain of your position.
(As published by The Australian Taxation Reporter Team, April 2014)
