Tightening the non-commercial loan rules

In the 2009–10 Federal Budget, the government announced new measures to improve the “integrity of the tax system” by tightening the rules relating to:

private companies taking out personal loans from the business, and
the benefits provided by a private company to its shareholders or their associates.

Shareholder Loans

The Australian Taxation Office (ATO) has sent hundreds of letters to tax agents representing shareholders of private companies, warning them against breaching rules while taking out personal loans from their businesses.

The letters are reportedly an attempt to crackdown on companies that are not charging commercial interest rates to shareholders and associates, where loan repayments are not being made and on shareholders who are combining their private and company expenses.

If the ATO finds shareholders have breached any of these laws, they could be charged a penalty tax rate of up to 46.5% on their loans.

Deputy Tax Commissioner Mark Konza told the Australian Financial Review the letters are part of an early intervention program.

"These letters are an attempt to give people a reminder so they can get those matters right before the tax returns are lodged," he said. "These letters are building a growing emphasis on Division 7A [private company loans laws] over the past few years."

"At its simplest, if you've got a company that's given a loan to shareholders then the Tax Office is looking to see if you've done one of two things, which is either repay the loan, or reduce the loan to writing in compliance with Division 7A provisions."

The ATO's objective is to crack down on businesses disguising their profits as loans, and therefore distributing them tax free to shareholders.

Benefits provided by a private company

The Government will extend emphasis on Division 7A to cover circumstances where a shareholder (or their associates) is permitted to use a company asset such as real estate, a car or boat for free or at a discounted rate. While fringe benefits tax would apply to the use of such assets by employees, the same use of the assets by shareholders would be tax free.

This measure will remove this inconsistent treatment by deeming a 'payment' made to a shareholder through the free use of a company asset to be a dividend and taxable accordingly. In doing so, it will ensure that shareholders pay their fair share of tax.

Contact your Baker Affleck accountant to discuss these new rules and how they relate to your business.

Source:

"ATO cracks down on shareholder loans" written by Patrick Stafford from www.smartcompany.com.au Australian Taxation Office website