A loan agreement is an agreement between two parties whereby one party (the lender) agrees to provide a loan to the other party (the borrower).
A Division 7A loan agreement is a loan agreement that covers certain payments or loans that are made or debts that are forgiven by a private (i.e. proprietary limited) company, and would otherwise be treated for tax purposes as assessable income of the recipient.
Division 7A of the Income Tax Assessment Act 1936 (Cth) prevents private companies from making tax free distributions to shareholders or their associates. Generally, it treats as unfranked dividends any amounts paid by a company to its shareholders or their associates, amounts lent by a company to its shareholders or their associates, and debts owed to a company by its shareholders or their associates that are forgiven. Such amounts would be assessable income of those shareholders or their associates.
Where a Division 7A loan agreement is in place between a private company and a shareholder or shareholder’s associate the terms of the loan agreement will negate the operation of Division 7A.
If a Division 7A Loan Agreement is not correct for your circumstances, please view our Loan Agreement template.
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LegalVision’s LVDox™ Division 7a Loan Agreement template sets out:
- an interest clause;
- a repayment clause; and
- costs and expenses, amendments, waiver and governing law clauses.
Note: The Term should be 25 years (if the loan is secured in full by a real property mortgage) or 7 years (if the loan is not secured).
The document is 12 pages long and contains 7 clauses and 1 schedule.
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