Convert a Seven-Year Loan into a 25-Year Loan
Are you a business owner that has previously loaned money from your business to personal account?
The Australian Taxation Office (ATO) has recently altered their guidelines related to private company loans. It is important that business owners are aware of these changes, as the ATO can now hand out fines as a worst case scenario for those who are not compliant.
What changes have the ATO made to their guidelines?
In order to create tax efficiency in the past, shareholders would loan themselves money from their private company, which they would eventually pay back. The ATO have decided to enforce new limitations on such loans, perceiving them to be problematic. A shareholder is required to make a minimum yearly payment for the duration of the loan. If they fail to make this payment, their private company is required to pay a dividend equal to the shortfall in the required payment.
If, under Section 109N of the Federal Tax Legislation, the loan fulfils the following criteria, the private company is not required to pay a dividend:
- The agreement that the loan was made under is in writing
- The rate of interest payable on the loan after the year in which the loan is made is equal or greater than the benchmark interest rate of the year
- The term of the loan does not exceed the maximum term for that loan (seven or 25 years)
To put it simply, business owners are being held accountable for the money they loan to themselves from their private company. Either they pay this loan back to themselves within the income year, or the company must pay a dividend which is taxable.
There is a solution! Lawrence look after over 2,500 small to medium businesses in WA, and have gone to bat for a number of them on this issue.
How do you increase the maximum term for a loan?
One condition under Section 109N of the Australian Federal Tax Legislation, is that the term of the loan does not exceed the maximum term. It is possible to convert a seven-year loan into a 25-year loan, meaning that you carry the loan for a longer period of time. Lawrence can assist you in fulfilling the criteria for a 25-year loan.
The maximum term for a loan is 25 years if:
- 100% of the value is secured by a mortgage over real property that has been legally registered.
- The market value of the property is at least 110% of the amount of the loan when the loan is first made.
In all other circumstances, the maximum term of the loan is seven years. ATO’s private company loan guidelines may be difficult to understand and to apply to your business but there is a solution.
We offer $1000 of our accountant’s time for free to review your last completed financials. That way, we know exactly what you need and how we can help enhance your business. The longer companies wait, the more chance there is that the ATO will take action with potentially higher fines!