Avoid surprises when borrowing from your company

Avoid surprises when borrowing from your company

Are you planning to borrow some money or take a loan from a private company you are working with? Though the process of borrowing may be simpler, there may be consequences you are not aware of or acknowledged before. In the worst case scenario, if the loan doesn’t adhere to specific guidelines, you may end up paying more tax.

Before borrowing money from your private company, it is crucial to comprehend the rules for properly repaying a loan for income tax reasons. If not, the loan may be considered a Division 7A dividend and included in your tax assessable income.

Division 7A is designed to stop assets or profits from being given tax-free to shareholders or their associates. A borrower cannot directly or indirectly borrow additional funds from the same organisation to make minimum yearly payments or repay the debt. If you still end up doing so, these payments might not be considered for the purpose of repayment of Division 7A.

There are still instances where payments are made on business loans that don’t meet the criteria. These consist of:

  • Money or assets that are directly or indirectly borrowed from a company in order to make payments, including minimum yearly repayments for a loan from the same company
  • Loans being repaid shortly before the private company’s lodgement day directly or indirectly
  • Reborrowing a similar or larger amount from the same company.

Check your private business loans and if you have any questions about whether a payment will be considered, check with your qualified tax adviser or get in touch with the Australian Taxation Office directly.

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