38. What are Divison 7A clauses?

If a private company makes a loan to a shareholder or an associate of a shareholder, the company may be taken to have paid a dividend to that entity under the provisions of Division 7A of the Income Tax Assessment Act 1936 ('Act'). In addition the Division catches loans made to interposed entities and certain loans made by trusts.

Loans are broadly defined by the Act and include forgiven debts.

Some loans are specifically excluded under Division 7A including loans which meet certain criteria in relation to interest rate, maximum term and annual repayment (Section 109N).

These loans must be in writing and be in place at the earlier of the company lodging its return for that year and the due date for lodgement of the return.

The Commissioner of Taxation takes the view that a clause in a company's constitution can satisfy Section 109N.

Our constitution for private companies contains clauses which satisfy Section 109N of the Act. In addition we can also provide our clients with specific Division 7A loan agreements.

To request a Division 7A agreement order form click here.