(upbeat music)
-: Division 7A of the ITAA 1936
is an anti-avoidance measure
which prevents private companies
making tax-free distributions of profits to shareholders,
which are disguised as advances, debt forgiveness,
loans, or other payments.
Let's consider an example
focusing specifically on the aspect of loans.
Belinda Jones was advanced a loan of $200,000.
The loan was made under a written agreement
and for a period of six years.
Under the loan agreement, interest is not charged
until the beginning of the following income year.
And no minimum loan repayment is required to be made
until the beginning of the following income year.
Can Division 7A apply to this loan?
Initially, it is noted that loans
that are fully repaid before the due date
or actual lodgement date of the company's tax return,
are not treated as deemed dividends under Division 7A.
If the loan is not fully repaid at this time,
the loan will be treated as a deemed dividend,
subject to the amount
of the company's distributable surplus.
However, it is evident that the loan made to Belinda
may actually be structured as a complying loan.
That is, one that meets a criteria
of a minimum interest and a maximum term.
In this regard, we need to consider
whether the loan falls under any of the exclusions
from Division 7A,
which tells us loans that are not treated as dividends.
Based on the list of exclusions,
it is evident that Belinda's loan
is one that meets a minimum interest rate
and has a maximum term criteria
and a section 109N,
and will therefore not be a Division 7A dividend
so long as the conditions are met.
That is, that it is made under a written agreement,
the rate of interest equals or exceeds
the benchmark rate,
and the term does not exceed
the maximum term per Section 109N, Subsection 3.
The key condition that needs to be checked
is whether the interest rate meets or exceeds
the benchmark interest rate published by the reserve bank.
The single loan provider to Belinda
may also constitute an amalgamated loan.
Amalgamated loans do not constitute a dividend
in the year in which the amalgamation occurs
and do not require a repayment of principal
in the year in which the loan was made.
However, amalgamated loans do require
yearly repayments of principal and interest in later years
in order to to avoid Division 7A deemed dividends
in future years.
So, we need to work out the minimum yearly repayments,
and these are calculated according to a formula
in Section 109E, Subsection 6.
For subsequent years, it is necessary
to allocate that part of the previous year's repayment,
which constitutes interest versus principal.
The interest portion is calculated
by applying the benchmark interest rate
to the outstanding loan balance
calculated on a daily basis.
The amount advanced to Belinda Jones
will represent an amalgamated loan of $200,000
at the end of the year.
The outstanding loan balance
will be the original amount advanced,
plus interest less the minimum repayment made.
Assuming in this case that Belinda
did not actually make a repayment on the loan yet,
then she did not meet the minimum yearly repayment,
and as such, the company will be taken
to have paid a dividend under Division 7A.
Where the minimum yearly repayments under the loan
fall short of the required amount by the due date,
the amount of the deemed dividend that arises
is the amount of the shortfall in the tax year
and not the outstanding amount of the loan balance.
It should also be noted that the Commissioner of taxation
has a discretion in cases of hardship
to disregard the failure to make a minimum yearly repayment.
To recap, we need to understand that Division 7A
can apply to treat certain loans
as unfrankable deemed dividends,
where certain conditions are met,
and the exclusions do not apply.