Loan to a company - to prove a loan & not equity
Your company buys a truck. Instead of the company borrowing the money from a bank, you draw the money out of your own bank account. Did you loan the money to the company? Or was it an injection of cash? The ATO says because there is no legally enforceable Loan Agreement it was an injection of cash. This means that it is difficult to get the money back tax-free.
These are the Debt / Equity tax rules. They classify financial interests in companies as either debt or equity. This is having regard to the essential characteristics of the relevant financial interest rather than its legal form.
Importantly, where a loan is classified as equity rather than debt, any interest payable on the loan will not be tax deductible but frankable. This is just like a dividend. Worse still, repayment of the loan by a company may be taxed as a dividend.
Furthermore, the thin capitalisation rules that apply to disallow debt deductions, in certain circumstances, will also be impacted by the debt / equity classification of ‘at call’ loans.
Here is an example:
John is a shareholder in Andersons Pty Ltd. He lends $100,000 to the company. Sadly, there is no written loan agreement. There is legal document supporting the loan.
Under the Debt / Equity rules, the above loan is treated instead as an equity interest. The ATO does not treat it as a loan.
The result? As an equity interest, any interest payable on the loan is not deductible to the company. Further, when the loan is repaid by the compnay, the repayment is classified as a non-share dividend paid from the company. John is assessed on the repayment of the loan.
But what about the $20m turnover exception?
Related party non-documented loans provided to companies with an annual turnover of less than $20 million (excluding GST) may not be subject to the Debt / Equity rules. But this is not always the case.
To put the matter beyond doubt build this Loan Agreement.
What does this document contain?
The Loan Agreement Document
Our law firm’s letter of advice on our law firm’s letterhead and signed by one of our Partners.
Why is it better to prepare my legal document on a law firm’s website?
You are dealing directly with a law firm’s website, therefore you:
- retain legal professional privilege
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- receive legal advice from us
- You are supported by our 100% money back guarantee on every document you build
For more legal advice telephone us. We are a law firm. We can help you answer the questions.
Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
ption: 08 6389-0100