This document provides a very simple example of a clause in a loan agreement which provides that division 7A of the Income Tax Assessment Act 1936 (Cth) (Act) does not apply to a particular loan. However, it is important as always to customise these clauses to the specific circumstances of the parties.
This clause is designed to be inserted into a loan agreement. The defined terms in this clause have the same meaning as those in the precedent called “Basic loan agreement”.
Division 7A of the Act effectively treats loans as dividends in certain instances and is applicable to loans made by:
- non-resident private companies to Australian resident shareholders, or their associates; and
- closely-held corporate limited partnerships to shareholders or their associates.
Where a private company or closely held corporate limited partnership lends an amount to a shareholder or an associate of the shareholder during any given year, the loan may be considered by the Australian Taxation Office to be a dividend under division 7A of the Act. The application of division 7A of the Act is fairly complex and it is suggested that advice is sought from a taxation expert whenever a non-resident private company or closely held corporate limited partnership intends to loan money to a shareholder or their associate.
Loan agreements governed by division 7A
From a drafting perspective, when drafting loan agreements that may be governed by division 7A of the Act consideration must be had as to whether division 7A applies to the loan or not. Afterwards, it would be prudent to set out in the agreement whether or not the loan is covered by division 7A. If the conclusion is that it is not covered by division 7A, clear reasons should be given as to why.
- Basic loan agreement
- Guarantee of payment of loan
- General security deed
- Amendment and restatement agreement
- Deed of priority
- Forbearance of debt agreement
- Real property mortgage
- Deed of assignment of debt
- Loan agreement checklist
This document has been authored for Lexis Nexis by Elise Margow, Principal, Legally Speaking.
This document is prepared with the assistance of Specialist Editors Geoff Geha, Partner, Clayton Utz and Karen Lee, Principal and Consultant, Legal Know-How.