In response to recent changes to the deemed dividend provisions and the one-off offer from the Commissioner, Cleardocs has changed its Div 7A Loan Agreement so that it may be used as part of a taxpayer's 'corrective action'.
Now, and until 30 June 2008, when you purchase a Div 7A Loan Agreement from Cleardocs, you have the option to have the agreement cover payments (or 'loans') already made to company shareholders or their associates (recipients).
Division 7A of the Income Tax Assessment Act 1936 (ITAA36) (Div 7A) seeks to capture and tax certain payments (or 'loans') to recipients..
The relevant sort of payments If a company makes a payment or a loan to a recipient, or forgives a debt that a recipient owed to the company (receipt), then it is unlikely that the recipient would consider this to be taxable income.
How those payments are "caught" in the tax net Div 7A says that those amounts are to be treated as company dividends — which means they are "income" for tax purposes.
These "dividends" are also 'unfrankable'. This means that even though the company pays 30% tax on the income, the recipient has to pay tax on the amount they receive. Effectively, the amount is taxed twice — that is, it is taxed once in the company's hands and once in the recipient's hands. The total tax paid can be up to 61.5 cents in the dollar.
However, someone intending to borrow money from a company can avoid this tax penalty by documenting the receipt as a loan. The relevant loan agreement must comply with minimum requirements set out in section 109N of Div 7A.
The Cleardocs Div7A Loan Agreement complies with those requirements. They are:
Also, until the recent changes, the loan agreement must have pre-dated the receipt — so you could not just fix a receipt by converting it into a Div 7A loan.
Since October 2003, Cleardocs has offered a standard form loan agreement that meets the requirements of section 109N of Div 7A.
The key changes are :
The changes were made in Tax Laws Amendment (2007 Measures No. 3) Act 2007, passed by the Federal Government earlier this year.
The Commissioner has exercised his new discretion to disregard the operation of Div 7A in respect of certain payments. He has done this by issuing Practice Statement Law Administration 2007/20 (the PSLA).
Under the PSLA, anyone who receives a relevant amount after 1 July 2001 up to 30 June 2007 can avoid those amounts becoming deemed dividends under Div 7A. This avoidance takes effect from the date of the payment — as long as the recipient takes 'corrective action' in respect of the amounts.
The corrective action required depends on the nature of the receipt, but generally includes:
The PSLA provides relief only if full 'corrective action' is taken.
We suggest that people should seek advice on whether 'corrective action' is required in circumstances such as:
|Step 1.||Arrange for a full review the company's or the associated trust's records to ascertain all receipts that could be deemed dividends.|
|Step 2.||Seek advice as to whether those receipts should be the subject of 'corrective action' and what this requires.|
|Step 3.||If 'corrective action' is appropriate, take full corrective action including documenting the receipts in a loan agreement that complies with section 109N of Div 7A. Of course, Cleardocs can assist with this here.|
Most importantly, as always, seek professional advice.
For more information, contact Maddocks on 03 9288 0555 and ask for Paul Ellis.
Paul is a Senior Associate in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.