Division 7A

Q&A Tax

Question :

The company currently holds a house as an asset. the director now wishes to transfer this out into
his and his wife name (main residence).- there will be no money exchanged, hence this will create a
division 7a loan arrangement.

The questions are as follows :

If they enter into a 25-year loan agreement in place say the 3 July 2017. does this mean the first
minimum repayment is due by 30th June 2018? or is 30th June 2019 as the loan is taken into
account at end of the financial year 2018?

is it possible to repay the loan beyond 7 years?

 

Answer :

The starting point is to determine the year in which the loan is made. If the asset is transferred to
the clients in the 2018 income year and the parties agree that this will be financed by a loan from
the company, then:

• The complying Division 7A loan agreement needs to be put in place by the earlier of the due date
and actual lodgement date for the company’s 2018 tax return;

• The first minimum loan repayment will be due by 30 June 2019 (ie, the end of the year following
the year in which the loan was made).

The default position is that a Division 7A loan agreement cannot extend beyond 7 years. However,
the maximum loan term can be extended to 25 years in some cases. In order to place a loan under a
25-year loan agreement the following conditions need to be met:

• The full value of the loan from the company must be secured by a mortgage over real property that
is registered in accordance with relevant State or Territory law; and

• At the time the loan is made, the market value of the property (less any higher-ranking liabilities
secured over the property) is at least 110% of the amount of the loan.

The rules also allow you to refinance from an existing 7-year loan to a 25-year loan without
triggering the anti-avoidance rules within Division 7A that can apply to refinanced loans (section
109N and section 109R ITAA 1936). Note that you cannot simply convert a 7-year loan to a 25-year
loan. The 7-year loan actually needs to be refinanced (ie, a new loan used to pay out an old loan).

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