What is needed in a Division 7A Loan Agreement?

QUESTION: My client has a home made Div 7A Loan Agreement. I am not sure if it complies with Division 7A of the Income Tax Act 1936 (Tax Act).

His Loan Agreement doesn't include the names of the parties (but they have signed as an agreement). Nor is the actual interest rate clearly defined (it is defined "as agreed between the parties").

Given that I can build Div 7A Loan Agreements for $44 each at LawCentral www.lawcentral.com.au, my client would have been better off just doing that.

I have prepared a Div 7A Loan Agreement for my client at LawCentral. Does he still need to rely on his old Div 7A Loan Agreement.

ANSWER: Well, at least the old Loan Agreement is in writing. I have actually seen some attempted by minutes. But, I think that your client has some problems.

The ATO Draft Tax Determination TD 2007/D19 was released on 14 November 2007. It merely confirms common sense and the law. If:

your private company

makes a loan

to a shareholder or associate (e.g. your family)

in an income tax year; and

the loan has not been fully repaid



then you need a written Loan Agreement -- called a Division 7A Loan Agreement.

The ATO goes on to state the elements that are required for the Loan Agreement (to comply with 109N of the Tax Act):

the names of the parties (e.g. company name and shareholder)

the loan terms

the amount of the loan (this should be referrable back to the company balance sheet)

date the loan amount is drawn (this should also be as set out in the balance sheet of the company)

requirement to repay the loan amount (e.g. a amount each year)

the period of the loan (e.g. 7 years)

interest rate payable (the Loan Agreement should say it is the rate set by the ATO each year)

that the parties named have agreed to the terms

the date the agreement was in writing, for example the date it was signed or executed
The Tax Office says it is best to achieve this either in:

a formal written Loan Agreement (such as the one you can buy at LawCentral)

or it can be in your Company Constitution (but while the shareholder gains the benefit of this, your "associate", such as your children are not shareholders and need their own Loan Agreement)



What if you don't have either? The ATO considers the requirement for the Loan Agreement to be in writing is satisfied if there is written confirmation of the existence of the agreement and the essential elements. But, in practice I have never seen this as being acceptable to the ATO.

For our Platinum Members that paid their $99 to upgrade I have set out these requirements in further detail below in red.

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