Division 7A Loan Agreement

You can use Cleardocs to create a 'Division 7A' Loan Agreement. That sort of agreement covers the situation in which a company makes a loan:

• to a shareholder or shareholders of that company; or
• to an associate of a shareholder of that company - the term 'associate' has the same meaning as in Division 7A of the Income Tax Assessment Act 1936.

Until 30 June 2008, you can also use the Cleardocs Division 7A Loan Agreement to convert a 'loan' into a documented loan that gains the tax protection of Div 7A. This applies to any 'loan' that:

• is either an undocumented loan or other payment to a shareholder or their associate, or it is the forgiveness of a debt of a shareholder or their associate was made by the company, or in certain circumstances, a trust associated with the company, and
• was made since 1 July 2001.

This can be done as part of a strategy to ensure the 'loan' is not deemed to be a dividend and therefore subject to unfavourable tax treatment. Read more about this below.

top of page

Why consider arranging a 'Division 7A' Loan Agreement?

Below, we set out some of the advantages of having a 'Division 7A' Loan Agreement in place. However, before you decide to arrange one, you should get legal advice. We cannot give you that advice. As we do not know your company's situation, you need to remember that the summary below is for information purposes only.

If you borrow money from a Pty Ltd company without this agreement in place before the money is taken, the ATO deems the money to be 'unfrankable dividends' and taxes the 'loan' very unfavourably.

With the agreement in place, you can avoid this situation in case money ever needs to be borrowed for personal use from the company in the future.

top of page

Tax Commissioner's moratorium on undocumented 'loans'

In August 2007, the Australian Tax Commissioner announced that the ATO will provide companies with a one-off opportunity to correct past mistakes in respect of payments and loans from companies to shareholders and their associates. This means the recipients of those 'loans' do not have to pay additional income tax in relation to those loans. The penalties would apply under Division 7A.

Timing This opportunity applies to transactions made between 1 July 2001 and 30 June 2007. However, the opportunity ends on 30 June 2008.

To take advantage of this opportunity companies and the shareholder or associate who have benefited from the 'loan' must take 'corrective action'. The Cleardocs Division 7A Loan Agreement is the first step in that 'corrective action'. The steps are:

To read more about this opportunity and Division 7A Loan Agreements read our 'Clearlaw Bulletin' here.

top of page

How long does the process take?

Creating the document takes less than 5 minutes. You can download the documents immediately.

top of page

Questions or further information

If you have questions:

• about how to use Cleardocs, contact the Cleardocs helpline on 1300 307 343.
• about legal issues, contact the Cleardocs helpline on 1300 307 343. If you need advice, we will arrange for you to speak with a lawyer at Maddocks. The firm provides a free legal helpline in relation to the documents Cleardocs provides. If you require other legal advice in relation to your particular circumstances, then this will be charged for.