A question on director loans for pty ltd companies

Hi All,

If one has a pty ltd company for which they are sole director and sole shareholder, I understand you can provide a director loan but there is a government set interest rate based on commercial terms. I think its something like BBSW + 5% so something like 7% at the moment?

If one were to make a short term temporary director loan repaid in a short period, could that loan be provided and then repaid at 0% interest rate, eg a loan repaid in 5 months? Are there any restrictions in doing regular short term loans?

Thanks in advance for all help.
 
Hi All,

If one has a pty ltd company for which they are sole director and sole shareholder, I understand you can provide a director loan but there is a government set interest rate based on commercial terms. I think its something like BBSW + 5% so something like 7% at the moment?

If one were to make a short term temporary director loan repaid in a short period, could that loan be provided and then repaid at 0% interest rate, eg a loan repaid in 5 months? Are there any restrictions in doing regular short term loans?

Thanks in advance for all help.

The above is vague. If 'you' refers to the individual then Div 7a won't apply to loans you lend to the company. Is this what you mean?
 
The above is vague. If 'you' refers to the individual then Div 7a won't apply to loans you lend to the company. Is this what you mean?

I'm referring to a company loaning to a director, not a director loaning to a company. The director loan is an alternative to a dividend distribution.

The query then relates to what are the terms and rules around such related party loans. Can a short term loan that is repaid in a short period be issued without an interest?
 
If it's a short term loan why not just pay the interest?

I'm sure there's a lot of different things to do, I just want to understand what rules are obligatory. Eg a short term loan from the company to a director that wouldn't incur interest rate would be a very effective means for the director to access capital.
 
I'm sure there's a lot of different things to do, I just want to understand what rules are obligatory. Eg a short term loan from the company to a director that wouldn't incur interest rate would be a very effective means for the director to access capital.

The ato thinks so too.
 
'you' can't provide a director loan, but the company can loan you money.

From a taxation point of view Division 7A will apply. See s109C ITAA36 onwards. Without looking it up, it is my understanding that it may be possible for the company to lend to an associate once as long as it is paid back before the end of the financial year.


You also have to consider the laws of equity and Corporations Act.
 
'you' can't provide a director loan, but the company can loan you money.

From a taxation point of view Division 7A will apply. See s109C ITAA36 onwards. Without looking it up, it is my understanding that it may be possible for the company to lend to an associate once as long as it is paid back before the end of the financial year.


You also have to consider the laws of equity and Corporations Act.

Thanks for your feedback. So you think the company can only loan to a person once, if they repay the loan the cnmpany couldn't loan to them again? Even if it was at commercial interest rates?
 
No, a company could still lend.

Given that, there would seem nothing to stop a director regularly accessing short term loans from the company repaid back before the end of the financial year, then issued again in July in the next financial year. This would be a very effective way for the director to access capital as needed.
 
Given that, there would seem nothing to stop a director regularly accessing short term loans from the company repaid back before the end of the financial year, then issued again in July in the next financial year. This would be a very effective way for the director to access capital as needed.

Back to back loans are deemed not to have been "repaid" by lodgement date.

Where it has not been converted to a complying loan by lodgement date then the amount will be deemed an unfranked dividend.

Ignoring the temporary deficit levy, the effective tax rate for the deemed dividend could be as high as 62.9%.

Why don't you pay yourself a salary or franked dividends instead? At least that is only taxed at your marginal rate.
 
Back to back loans are deemed not to have been "repaid" by lodgement date.

Where it has not been converted to a complying loan by lodgement date then the amount will be deemed an unfranked dividend.

Ignoring the temporary deficit levy, the effective tax rate for the deemed dividend could be as high as 62.9%.

Why don't you pay yourself a salary or franked dividends instead? At least that is only taxed at your marginal rate.

Thanks for the response. What's the definition of a back to back loan? To mitigate this issue I guess you would just need to ensure the minimum time period is met between repayment of one loan and issue of another loan.
 
Thanks for the response. What's the definition of a back to back loan? To mitigate this issue I guess you would just need to ensure the minimum time period is met between repayment of one loan and issue of another loan.

There is no "minimum time". It is purely a "reasonable person" test, that on the facts it would be reasonable to assume that a loan was repaid prior to lodgement date in connection with the new loan issued after that date.

The beauty with legislation that requires the Commissioner to form an opinion is that it is virtually unassailable. Even in a tribunal he is deemed to be correct and you have to show otherwise.

Division 7A has evolved over many years to deal with more complex schemes than this one.
 
Rob

What about a company lending to husband, husband paying back and a month later the company lends to wife. Do you think this would be captured by s109T? Interposed entities if the husband and wife used the money independently of each other?
 
On a longer term loan from a company to a director or other party, I believe there's a regulated minimum rate that it needs to be provided at, for a simple unsecured loan, is it something like BBSW + 5% say 7% in total?
 
And then there may be a FBT issue unless the minimum statutory rate of interest is paid. So the zero rated loan may be subject to FBT where a 7% loan is not.
 
Eg a short term loan from the company to a director that wouldn't incur interest rate would be a very effective means for the director to access capital.

FBT: Whether a loan is in respect of employment (as opposed to merely being incidental) is a question of fact.

If there has been no history of paying salary or benefits as remuneration, but rather dividends or appropriations of capital then it may be in respect the shareholder relationship.

See MT2019
 
:D Yes Rob - I didn't want to go there when I drew the FBT card. I was thinking you may be the one to post that if I played the FBT card. That's why I said may. But the OP did ask about a Director loan which is often one of employment. FBT can also extend to third parties etc
FBT and Div7A are intertwined and complexity is the message. Fringe benefits can satisfy the gainfully employed test too and there can be strategies in this.

Personal tax advice is best obtained.
 
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