Private company loans

The ability to manage a family business or a families investment portfolio is significantly impacted by how a family in business can extract money from a company. The area of tax law governing private company loans (referred to in the tax legislation as “Division 7a”) creates tax opportunities and also can equally create tax controversy when not managed with care and knowledge.

At its simplest level tax law (Division 7a) requires that if you borrow money from a company you have to pay it back – with interest. And that simple concept has created a multitude of problems.

For discretionary trusts Westcourt have been knowledge in current tax reforms impacting how trust profits are payable to companies that enjoy the trust profits but have not yet received the cash (“UPE’s”).

At Westcourt we have expertise in the application and operation of Division 7a. With experience ranging back to its precursor provisions (“section 108”) and through multiple stages of reform from 1997, 2004, 2005, 2007, 2010 and to the numerous range of ATO Tax Rulings of Division 7a (many of which lap over each other) we have the technical knowledge to cut through history and complexity and create a solution that works for your family and the family objectives with both investments and succession.

The operation of many strategies for Division 7a is also practically difficult to apply correctly. With trust profits that have not yet been paid (“UPE’s”) sitting in sub-trust, option 1 agreements, option 2 agreement or s109N loans – we understand that the tax strategy can often fail because the tax implementation and documentation of the strategy is simply lacking. So we back that vigour up not only with technical tax excellence within the firm but also through technology and a precedent database as a CCH Gold Partner and using the templates and checklist strength from BusinessFitness to simplify and automate much of the difficult Division 7a tax laws that apply to these structures.

And while these different items sound confusing we focus on cashflow forecasting the tax cost of each – together with the expected accounting and advice fees for each option.

We also model different approaches to managing Division 7a loans. A typically example was with a client recently when we highlighted the higher cost of interest they were required to pay under the ATO mandated loan agreement. Our client then refinanced their internal loan with a bank loan at a much lower interest rate, and reduced their overall tax liability by eliminating the Division 7a loan altogether.

Another instance is structuring employee loans to buy shares prior to the employee becoming a shareholder – such that the loan is governed by the fringe benefits tax laws as compared to the tax law governing Division 7a.

As a practice which has only one focus – families in business – and with proven technical excellence and proven senior tax leadership we are ideally placed to help smart families properly comply with this area of problematic law and also take advantage of how the Division 7a laws can help your family enjoy the tax and investment opportunities that are legitimately available.

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