As part of the recent Federal Budget the Government has stated that they are committed to amending the rules on loans from private companies in line with the Board of Taxation’s 2015 recommendations, but will defer those changes until 1 July 2019.
As a reminder those recommendations are:
The Board has developed a reform model called the ‘Amortisation Model’, which has the following characteristics:
- The maximum loan term would be 10 years (compared with the current 7 year term for unsecured loans and 25 years for secured loans).
- The prescribed maximum loan balances during the term of the loan (including any accumulated interest) would be as follows:
- 75 per cent of the original loan still due by the end of year three;
- 55 per cent of the original loan by the end of year five;
- 25 per cent of the original loan by the end of year eight; and
- 0 per cent of the original loan (that is, fully repaid) by the end of year 10.
- Similarly, interest would be able to be accrued annually but would have to be paid by the end of years three, five, eight and 10.
- There should be no requirement for a formal written agreement between the parties. However, written or electronic evidence showing that a loan was entered into must exist by lodgement day for the income year in which the loan was made.
- The required interest rate would increase to be the RBA rate for small business variable overdrafts for the month of May of the year of the loan. At May 2018 this rate was 8.65% (compared to the current 5.3% Division 7A rate).
As a result whilst all post 1 July 2019 private company loans will need to be on these terms, we understand that existing 7 year loans will automatically convert to 10 year loans, on the above terms, effectively extending the repayment period a further 3 years.
We would expect that amendments would be required to existing Division 7A Loan Agreements to effectively change the previously agreed terms to take advantage of these new terms. Obviously we will need to wait and see the detail as to how this should occur.
The devil in the detail though is the Board’s recommendation that ALL loans be included in this new regime. That is, loans taken out prior to December 1997 (which are currently quarantined) together with Unpaid Present Entitlements (UPEs) existing prior to 2010 years. These will require some consideration given they are currently quarantined and do not require regular repayments.
If you would like to discuss how these changes might affect your private company loans please call your Kennerlys Accountant (08) 9481 0746.