Possessing a Division 7A loan agreement protects you from paying additional taxes on dividends. It will not only save you money in taxes, but it can also safeguard the business and save you money in lawyers fees later on. This article by Business Kitz will walk you through the basics of what a 7A loan agreement is, its purposes and when to use it.
What is a Division 7A loan agreement?
First of all, before defining what a Division 7A loan agreement is, we need to understand what a loan agreement is. A loan agreement is a contract between two parties in which the lender agrees to make a loan to the other borrower. In this case, a Division 7A loan agreement covers certain payments or loans made by a private firm to a shareholder who is not allowed to make tax-free profits payments to shareholders or their associates.
When do you need a Division 7A agreement?
Division 7A loan agreements are employed by private companies that want to provide a loan to a shareholder or associate. The loan agreement acknowledges that both the lender and borrower details must be covered by the agreement. The loan agreement should include information such as interest rates, loans, and payback periods. Moreover, to effectively establish the loan agreement, you need to arrange for the loan agreement to be signed by all parties to the agreement.
To sum up, you should implement a 7A agreement template when:
- Any type of cash has been advanced;
- Financial or credit help has been offered;
- Financial assistance to shareholders and associates have been given;
- Funds have been transferred to a shareholder; or
- Any type of financial loan is actioned.
How do I comply with the Division 7A agreement?
To be compliant and avoid being considered a taxable dividend, a loan must meet the following conditions, according to the ATO:
- This agreement must be in place before the company’s income tax return deadline.
- The loan yearly interest rate must be equivalent to the Division 7A benchmark rate.
- Property-secured loans should not exceed 25 years.
- Other types of loans should have terms of no more than seven years.
- The yearly minimum payments must be met.
If you are hesitant about utilizing this agreement form, seek the advice of a skilled professional to ensure that it meets your specific needs. Our sister company, Legal Kitz can support you in negotiating or filling out agreements. You can book a free 30-minute consultation with their experienced and highly qualified team via our website now. Otherwise, Business Kitz has a number of agreements available via our subscription service!