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Loan provided to the company by the shareholder/director/employee of the company

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The shareholder/director/employee of the company provides loan to the business. The business will repay the loan with interest in the company months, how this needs to be treated.  

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Hi @BINDU,

 

Welcome to our Community and thanks for your patience whilst we received specialist information regarding your question.

 

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.

 

Thanks, JodieH.

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Devotee

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Anonymous

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When a shareholder / director makes a legitimate " arms length " loan to their own company then the following applies:

 

1/ The interest paid by the company to the lender is an allowable deduction to the company.

2/ The principal that is paid back to the lender is NOT an allowable deduction to the company as it is a capital expense.

3/ The interest received by the shareholder / director is assessable income in their hands and must be included in their taxable income.

 

In this 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 party, for example with relevant commercial rates of interest charged.  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.

 

These are my personal views on the issue.

 

 

Best answer

ATO Certified

Community Support

Replies 3

Hi @BINDU,

 

Welcome to our Community and thanks for your patience whilst we received specialist information regarding your question.

 

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.

 

Thanks, JodieH.

I'm new

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hi.

does ATO has intererst rate that we can rely on or refer to when a director lends money to his own company? 

 

thanks. 

Newbie

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What is the commercial interest rates

I'm new

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Hi, Jodie

 

When company pays back the principal of the loan, dose company has to pay company tax(27.5%) for the principle amount? 

 

Thanks.

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