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Re: Interest Charged on Director Loan to Company/Family Trust

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I'm new

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If a Director put a loan to his company or family trust, and he would like to charge an interest rate. Is there an ATO interest rate benchmark available for this situation? If yes, what is the rate for FY2016/17 and FY2017/18? Thank you!

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Hi @nicoleyang

 

Welcome to our Community!

 

Generally spekaing, there are no specific requirements as to interest charged by the director under such an agreement. 


If the company or trust intends to claim a tax deduction, the interest expense is only deductible to the extent that it is incurred in gaining or producing assessable income. You need to keep appropriate documentation to demonstrate that the interest expense has been incurred.


Also, if the director has borrowed the loan funds, and then on lends them to an entity, then the interest expense of the director is not deductible to the extent that the borrowed money has been used to benefit others.


However, if the loan is instead made by the entity to the director, you will need to consider the requirements under Division 7A. For more on this refer to Private company benefits – Division 7A dividends and Loans by private companies.

 

Thanks, JodieH. 

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Megastar

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Hi, 

These will qualify as Div 7A loans, you can find the interest rate in the below link 

 

https://www.ato.gov.au/Rates/Division-7A---benchmark-interest-rate/

 

Hope it helps 

 

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Anonymous

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Div 7A only applies when a company is making a loan to director / shareholder and therefor it does not apply to your situation.

 

Generally, if you're a shareholder/director/employee and you lend your own money to your company, this would usually be recorded in the company’s records as a loan, which will be a liability for the company. When the company pays back the principal of the loan, the payments will reduce the amount of the loan, but this would not usually be a deduction for the company, or assessable as income to you. 

 

Any interest payments the company makes would be deductible to the company, and will also be assessable income to you. You should make sure that any interest paid by the company is in line with commercial rates.

 

In this  type of senario everything would have to be well documented so it can be clearly demonstrated that the loan to the company was made along the lines that any other loan would have been made to the company by an independant third partyfor example with relevant commercial rates of interest charged, and this is known as the " arms length " principle ........   .  For another example, gross over charging of interest payable on the loan could be seen as not been an arms length transaction as there could be the shifting of profits from a party with a higher tax bracket to a party with a lower tax bracket and therefor it could be classified by the ATO as tax evasion or avoidance.

 

I suggest you contact one or two of the big banks and aske what the commercial loan rates are.

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Megastar

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Yup @Anonymous is correct, I misunderstood it as loan provided by the company to the directors/shareholder. Div 7A will be applicable only in case of UPE/ Loan provided by the company to director/shareholder.

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Hi @nicoleyang

 

Welcome to our Community!

 

Generally spekaing, there are no specific requirements as to interest charged by the director under such an agreement. 


If the company or trust intends to claim a tax deduction, the interest expense is only deductible to the extent that it is incurred in gaining or producing assessable income. You need to keep appropriate documentation to demonstrate that the interest expense has been incurred.


Also, if the director has borrowed the loan funds, and then on lends them to an entity, then the interest expense of the director is not deductible to the extent that the borrowed money has been used to benefit others.


However, if the loan is instead made by the entity to the director, you will need to consider the requirements under Division 7A. For more on this refer to Private company benefits – Division 7A dividends and Loans by private companies.

 

Thanks, JodieH. 

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I'm new

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Hi Jodie

Can we assume a director borrows money from the bank and then lends this money to his/her private company as a loan.

The company and director have an implied agreement that the company is charged the same interest that the director is charged by the bank.

Is the interest deductible to the company assuming the funds were used for earning assessable income for the company?

Are there any other issues that need to be tidied up to make this arrangement ok with the ATO?
Thanks.
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Devotee

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Hi @ConM,

 

We can only help you find general information here on Community. If you'd like detailed advice on how we think tax law applies in your situation, we'd encourage you to reach out to our early engagement team. Early engagement can follow up with you to discuss your situation and provide information specific to your case. You can ask for a follow up email or phone call by completing our online form.

 

Please note that our offices close from 6:00pm Friday 21 December and will reopen from 8:00am Wednesday 2 January 2019.

 

Thanks.

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Newbie

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Hello @JodieH ,

first time poster and following up on your answer to this earlier question, your response indicates no specific requirements for Interest on loans from Director, and that Interest paid may or may not be deductible/assessable. Does this infer that if no interest is paid (under a documented interest free loan agreement) and neither party intends to claim expenses/deductions, then there is no requirement to maintain commercial interest in this loan? Or does arms length principles apply either way?

 

Thanks.

 

 

 

 

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Hi @AndewM,

 

Thanks for your patience whilst we checked information with a specialist area.

 

There is no taxation requirement that a loan made by a director to a related company or trust must bear interest. The Division 7A rules apply to loans made by a company to a related party and require interest to be charged.

 

However, where interest is not charged on a ‘loan in’, rather than a ‘loan out’ by a company, interest will not arise and no amount of interest will be assessable or deductible. Whether or not the lender is entitled to any deductions depends upon their own circumstances. 

 

It needs to be noted though, that while there is an exception from Division 7A for companies repaying loans by parties such as directors, the loan being repaid has to represent a ‘pecuniary obligation’.

 

To the extent that an amount of the loan does not fit this description, the repayment being made by the company may not be shielded from the application of Division 7A for the recipient.

 

Hope this helps, JodieH.

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Thank you!