If John and Mary decide not to comply with safe harbor rules, they must be able to prove otherwise that the loan is granted at arm`s length (i.e. with a commercial LRBA benchmark). There is no mandatory form for the written agreement. However, the agreement should at least identify the parties, define the essential terms of the loan (i.e. the amount and duration of the loan, the obligation to repay and the interest rate payable) and be signed and dated by the parties. The interest rate on the loan for each year after the year in which the loan was granted must be higher or equal to the reference rate for each year. The repayment of the loan made after the end of the income year, but before the redundancy date for the first year of income, is recorded as a reduction in the amount owed, even if it is made before the conclusion of the loan agreement. Watch this video to learn more about compliance with Division 7A loans. When a shareholder or his or her partner repays a loan constituting in a year of profit after the year in which the constituent loan was granted, the repayment is considered the repayment of the merged loan. Example 11 – non-compliant loan to the shareholder with refund We intuitively know that a brief pain in the event of a removal of a bandage is preferable to a slow – and painful – replacement. This can also apply to the management of a Div 7A loan. If a customer has accumulated several years of Div 7A loans, they all need a minimum repayment per year. The sum of these annual repayments, paid in compensation for a dividend, can quite push the client into the higher tax class.
Therefore, if the client is still in the higher tax class, the alternative approach may still offer the possibility of savings described above. The rationale for change is weak. The basic idea seems to be the desire to have all taxpayers equal with respect to the credit of private companies. There is also the idea that these credits should be taxed at some point – many of these loans will be on hold for more than 20 years, without repayment or interest. Leaving the taxpayer, it is doubtful that many of these loans will be repaid in the foreseeable future.