Question

Y, an Australian resident, is the sole shareholder of ABC Pty Ltd, an Australian resident company. In this income year, ABC Pty Ltd made an interest free loan of $100,000 to Y. By the income year end, the company waived 40% of the loan. The balance of the loan remains outstanding by the company’s lodgement date. The company’s distributable surplus for the income year is $50,000.

Advise the tax implications of the above transaction for Y. How will your answer be different if the shareholder of ABC Pty Ltd is a wholly owned subsidiary of another company incorporated in Australia? Provide examples.

Answer 1

As a shareholder the person is an owner of the company and can be treated as a director of the company indirectly. A director’s loan, in short, is borrowing cash from the organisation through the director. There are many limits to the loan, though. Also referred to as a shareholder loan, this encompasses any cash taken out that isn’t wages or dividends. Whether you take the loan out in one lump sum or over numerous situations doesn’t exchange its nature. As a loan, it falls below Division 7A of the Income Tax Assessment Act 1936. That potential that the borrower in all likelihood doesn’t have to pay tax on the mortgage amount.

So as per the above submission the shareholder need not to pay any tax on the loan amount. However even though it is interest free loan there should be some repayment of the loan during the accounting year. The same is dicussed in the following paragraphs.

Minimum each year repayments on director’s loans fall underneath Division 7A. If the minimal price is no longer made, the deficit quantity turns into a dividend in that monetary yr below Division 7A. You should make the minimal reimbursement quantity by using June 30th of the 12 months they are due. Minimum mortgage compensation quantity calculates on the foundation of the complete loans made to a shareholder or director. In a way, director’s loans are a kind of activity free loan, due to the fact you pay the pastime to the company. However, the mortgage must have an activity price based totally on the mortgage amount. The pastime figures into the lender’s (company’s) assessable income.

So as per the above details eventhough the loan is free from tax but the waiver of the loan amount i.e. 40% is not free from tax. This waiver amount will be dealt as dividend and are taxable according to 7A.

The above scenario is explained taking into view the shareholder as an individual but as per the information the shareholder is fully owned subsidiary of another company. This means that he has a different legal entity and the treatmrnt of the loan for tax purpose will be different and explained in following lines.

Payments, loans and debt forgiveness between agencies are ignored. This is due to the fact Division 7A is focused at transactions which goal to take cost out of a corporation tax free. Transactions between agencies hold earnings inside a company shape and so are exempt. It simply means that intercompany transactions are ignored from tax purpose.