Why Loans from Companies to Directors Need a Written Loan Agreement
Last month a legal case Rowntree V FCT proves that only a legally prepared loan agreement will satisfy the ATO for related-party loans, often referred to as Div7A.
The danger with not having loan documentation in place is the ATO could very well assess the money as Income and charge tax accordingly, as was the case in Rowntree V FCT.
Div7A Loan agreements must be in place in writing before the transfer of funds takes place. By not having documentation in place ahead of the transfer, you leave yourself at risk of these funds being treated as income should you be the target of an ATO Audit.
Simply having journal entries or minutes supporting such a loan is not seen as satisfactory under the Law. A correctly prepared Div7A Loan Agreement must be prepared and signed before the transfer of any funds occur and now the legal precedent has been proven by the courts.
If you’re unsure how Div7A works – read our detailed article on the subject here https://pjtaccountants.com.au/division-7a-explained/
Further reading our article on how to treat and document for Div7a Loans and how to prevent triggering of the DIV7A rule by the ATO: https://pjtaccountants.com.au/shareholder_payments/
Of course, if you’re looking to undertake inter entity loans, or loans to Directors or Shareholders, please reach out to your trusted advisor at PJT ahead of undertaking the transactions. We will ensure all taxation issues are covered so a DIV7A rule is unlikely to be triggered.