Your company wants to buy a truck. But the company has no money.
Should the company borrow the money from the bank? No. You have some lazy cash. You give the money to the company. This is to buy the truck.
There is no legally enforceable Company Loan Agreement. The ATO claims it is an injection of cash. This means that it is difficult to get the money back tax-free.
When you give money to a company it is either:
The Debt/Equity tax rules started 1 July 2001. If money moves from you to your company the default position is that it is an injection of cash. It is not a loan. Undocumented money into a company is treated as an injection of cash as equity. Not as debt.
However, it is generally better to treat money you put into your company as a ‘loan’. This is rather than an injection of ‘equity’. If the money is equity (rather than debt) then:
In other words, if the loan is deemed an injection of equity it is expensive and hard to get the money back out of the company.
In contrast if you ‘lent’ money to your company, then you can take out that money from the company for free.
A related party ‘at-call’ loan is a financing arrangement. This is between:
For example, the
Let’s say you make a loan to your company. But there is nothing in writing. There is no written company loan agreement.
In your minutes and in your accounts, you classify the loan as a related party ‘at-call’ loan. But, sadly, this is not good enough.
Consider this loan to a company ‘at call’ loan:
Keith owns shares in his company. Keith lends $100,000 to his company. He forgets to build a Company Loan Agreement at www.legalconsolidated.com.au. Sadly:
The arrangement between Keith and his company is that the loan is repaid when Keith demands repayment – ‘at call’.
Sadly, under the Debt/Equity rules, the ATO treats the loan as an injection of equity; not as a loan.
The above rules do not currently apply to companies with an annual turnover of less than $20 million (excluding GST). However, it is not worth the risk. Your accountant for proper accounting standards and business practice requires a Company Loan Agreement. This puts the matter beyond doubt.
Further, if in any year your company does achieve a $20m plus turnover all loans are turned into equity. This is at that time.
Even with your Company Loan Agreement, there is a risk that over time it stops working. In Australia, each State and Territory has a Statute of Limitation. Your unsecured loan to a company goes ‘stale’ or ‘expires’ if no repayments are paid or none are demanded.
The Loan to Company limitation periods for each State and Territory for unsecured loans are:
So in the Northern Territory diaries every two years to come back to our website, log in and build a Deed of Recognition of a Loan.
For all other jurisdictions, you have 6 years before your Company Deed of Loan is barred by the Statute of Limitation. In that case, diarise every 5 years to come back to our website log in and and build a Deed of Recognition of a Loan. And sign it again to freshen it up. It starts the 6 year period running again.
In the movies, IOUs are often handwritten. This is on the back of an envelope.
Or, sometimes instead of a Deed of Loan, someone does a ‘minute’.
Rowntree v FCT  FCA 182 shows the additional care required to document even simple related-party transactions. This includes loans.
In this case, the taxpayer, a practising NSW lawyer, claimed he borrowed over $4m. This is from his group of private companies. The Court said:
‘Mr Rowntree has not deliberately chosen to ignore the law. His evidence presented to the Tribunal suggests that he genuinely believed that there were arguments to support his view that a loan was in existence.
He failed. Only a legally prepared Deed of Loan of a company satisfies the:
Seek advice and due diligence, legal and otherwise, on the credit worthiness and ability for the Company you are lending to make repayments and perform its obligations under the Loan Agreement.
The Lender seeks such advice independently. You should not rely on any person associated or related to the Borrower to give you such advice.
You need to make sure the person you are lending to is the person they say they are. If you are in doubt, seek professional and legal help.
You should undertake extensive checks on the identity of the company you are lending money to. Do a full historical search of that company with the Australian Securities and Investments Commission (ASIC). You should also make sure that the directors of the company are either the Borrowers as well, or as least are Guarantors under the Loan Agreement.
There are professional businesses that provide extensive and written credit checks on potential Borrowers. Use their services before you hand over any money. Use their services before you sign the Loan Agreement.
You are dealing directly with a law firm’s website, therefore you:
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
National: 1800 141 612
Mobile: 0477 796 959
Email: [email protected]