Division 7A Loan Agreement

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A Division 7A Loan Agreement is for use when a company is lending to a single borrower who is a director, shareholder or associate of a director or shareholder of that company. Section 109N (1) (a) in Division 7A of the Australian Income Tax Assessment Act 1936 sets out strict provisions and measures to ensure that private companies do not make tax free distributions of profits to shareholders or shareholders' associates in the form of payments, loans or forgiven debts. Having a written Division 7A Loan Agreement is crucial and will be valuable in the event of disagreements or misunderstandings.

Among others, this form includes the following provisions:
  • Parties to the Agreement: This provision contains the identity and names of the parties entering into the loan agreement;
  • Loan: This provision sets out the amount of the loan and the date given;
  • Interest: This provision sets out the rate of interest for the loan;
  • Repayment of Loan and Interest: This provision sets out the due date that the loan, together with interest, is payable;
  • Default: This provision sets forth procedures in place in the event of default.

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This lawyer-prepared packet contains:
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  2. Division 7A Loan Agreement for use in Australia
Law Compliance: This form complies with the state and territory laws of Australia
This is the content of the form and is provided for your convenience. It is not necessarily what the actual form looks like and does not include the information, instructions and other materials that come with the form you would purchase. An actual sample can also be viewed by clicking on the "Sample Form" near the top left of this page.
 
 
'DIVISION 7A' LOAN AGREEMENT
Section 109N of the Income Tax Assessment Act 1936 (Cth)

 

 
This Loan Agreement (“Agreement”) is made effective on _____________(“Effective Date”)
 
Between
_______________ Pty. Ltd. , a company incorporated and existing in _____________________[Mention State] having a registered office at  ___________________ [Mention Address] (the “Company”)
 
And
_________________________of ___________________, _______________[Mention Occupation/Designation] (the “Borrower”), who is a shareholder or associate of a shareholder, of the Company.
 
RECITALS:
 
A.   Company has and may advance moneys to Borrower by way of loan and the Borrowers are persons associated with the Company.
B.   Both parties wish to formally record the terms and conditions of all future and past borrowings made by Borrower from the Company.
 
DEFINITIONS:
 
Amalgamated loan means the total of all the loans made under this agreement that are made in a particular year of income and are not repaid by the end of that year.
 
Associate means what it means in Division 7A of the Income Tax Assessment Act 1936.
 
Loan means any of the following:
·   an advance of money
·   a provision of credit or of some other financial accommodation
·   a payment of an amount for or on behalf of or at the request of the borrower where there is an express or implied obligation to repay the amount
·   a transaction which in substance effects a loan of money.
·   it includes any of these that is deemed to have been made under the Income Tax Assessment Act 1936.
 
It has been agreed as follows:
 
 
1.   THE LOAN:
a.   Acknowledgement
The Borrower acknowledges that the Company has lent to Borrower the sum of Dollars_______________($__) (the “Loan”) on ________[Mention date].
 
b.   Loan at Companys discretion
Company may make one or more loans to the Borrower.  This Agreement applies to all loans made by the Company to the borrower, except loans to which the Company and the Borrower agree that this Agreement is not to apply.
 
c.   Interest on loans
Effective from 1 July after a loan is made by the Company, the Borrower must pay interest on the outstanding amount of that loan at the Benchmark Interest Rate as defined in the Income Tax Assessment Act 1936.
 
d.   Minimum annual repayment
In relation to each amalgamated loan, the Borrower must make annual repayments by 30 June each year that are at least the minimum yearly repayments as defined in section 109E(5) of the Income Tax Assessment Act 1936.
 
e.   Repayment of loan and interest
The Borrower must repay each loan to the Company, in addition to all interest that remains unpaid on it, no later than 7 years from the date the loan is made or is deemed by the Income Tax Assessment Act 1936 to have been made.  The Borrower may repay any part of a loan, and any interest on a loan, before that date.
 
If this Loan is unsecured, the Borrower should repay on or before such a date as provided under Division 7 A of the Income Tax Assessment Act 1936 upon which an unsecured loan to a Borrower must be repaid in order for it not to be treated as dividend.
 
f.   Capitalising interest
The Company may capitalise any unpaid interest that has become due.  That interest is then to be treated as having been added to the amount of the loan as from the date it became due.
 
g.   Company may require security
The Company may at any time require the Borrower to provide reasonable security for the performance of his obligations under this Agreement.
 
h.   Costs
The Borrower must pay the Company the costs it reasonably incurs in connection with this Agreement and any security the Borrower offers or provides under it. This includes stamp duty.
 
 
2.    DEFAULT
a.   Immediate Payment of Loan and Interest
The Company may elect to treat all loans made to the Borrower under this Agreement, and any unpaid interest that has accrued, as payable automatically and immediately if any of the following happens:
 
-   The Borrower fails to pay an amount in accordance with this Agreement.
-   The Borrower assigns any of his property for the benefit of creditors or any class of them.
-   The Borrowers interest in or under this Agreement is attached or is taken in execution under any legal process.
-   A mortgagee or person with a similar legal interest in any of the Borrowers assets takes possession of them or takes a step in that direction, or exercises a power of sale over them.
-   The Borrower ceases to conduct or suspends the conduct of a major part of its business, or threatens to do so, except for the purpose of a solvent reconstruction or amalgamation that has been approved by the Company.
-   The Borrower, being a Company, disposes of its assets, or threatens to do so, except for the purpose of a solvent reconstruction or amalgamation that has been approved by the Company.
-   A security interest becomes enforceable or is enforced against the Borrower.
-   A distress, attachment or other form of execution is levied or enforced against the Borrower for more than $1,000.
-   The Borrower takes any step to obtain protection under legislation against his creditors, or is granted that protection.
-   The Borrower commits an act of bankruptcy or becomes insolvent.
-   The Borrower passes a resolution to appoint an administrator or an administrator of the Borrower is appointed.
-   An order is made that the Borrower be wound-up.
-   An order is made appointing a liquidator or a provisional liquidator of the Borrower.
-   An order is made or a resolution is passed for the Borrower to enter into any arrangement, compromise or composition with or assignment for the benefit of its creditors or any class of them, except for the purposes of a solvent reconstruction or amalgamation previously approved by the Company.
-   The Borrower is, or states that it is, or under applicable legislation is taken to be, unable to pay its debts (except as a result of a failure to pay a debt or claim that is the subject of a dispute in good faith) or stops or suspends or threatens to stop or suspend payment of all or a class of its debts.
-   A receiver, receiver and manager, administrator, controller or similar officer of any of the assets or the whole or any part of the undertaking of the Borrower is appointed.
-   The Borrower is or makes a statement from which it may be reasonably deduced by the Company that the party is the subject of an event described in section 459C(2) of the Corporations Act 2001.
-   An event occurs that is analogous or having a substantially similar effect to any of the events specified in this clause occurs.
3.   MISCELLENEOUS
 
a.   Method of payment
The Company may inform the Borrower in writing that Borrower is required to make payment under this agreement in a specified way.
 
b.   Joint and individual liability
Where the Borrower is comprised of more than one person, the obligations imposed on a borrower by this document are imposed on those persons individually as well as jointly. A breach by any of them is a breach by all of them.
 
c.   Waiver
The failure of Company at any time to insist on performance of any provision of this Agreement is not a waiver of its right at any later time to insist on performance of that or any other provision of the Agreement.
 
d.   Variation
The parties can only vary this agreement in writing.
 
e.   Severability
If any provision of this Agreement is held by a Court of competent jurisdiction to be invalid, void or unenforceable, it will be severed from it and the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way.
f.   Jurisdiction
This Agreement is governed by the law of the jurisdiction in which the Company was incorporated. Each party submits to the jurisdiction of the courts of that jurisdiction.
 
[Signature Page Follows]
 
 
Executed as a deed.
 
Dated: _________________________.
 
 
Signed for Company: _________________________.
 
Title: _________________________________
 
 
 
Borrower/s: _________________________.
 
Title: _________________________________
 
Witnessed by: _________________________
 
Full Name of Witness: ________________________
 
Signature: ________________________________
 
Number of Pages7
DimensionsDesigned for Letter Size (8.5" x 11")
EditableYes (.doc, .wpd and .rtf)
UsageUnlimited number of prints
Product number#32607
This is the content of the form and is provided for your convenience. It is not necessarily what the actual form looks like and does not include the information, instructions and other materials that come with the form you would purchase. An actual sample can also be viewed by clicking on the "Sample Form" near the top left of this page.
 
 
'DIVISION 7A' LOAN AGREEMENT
Section 109N of the Income Tax Assessment Act 1936 (Cth)

 

 
This Loan Agreement (“Agreement”) is made effective on _____________(“Effective Date”)
 
Between
_______________ Pty. Ltd. , a company incorporated and existing in _____________________[Mention State] having a registered office at  ___________________ [Mention Address] (the “Company”)
 
And
_________________________of ___________________, _______________[Mention Occupation/Designation] (the “Borrower”), who is a shareholder or associate of a shareholder, of the Company.
 
RECITALS:
 
A.   Company has and may advance moneys to Borrower by way of loan and the Borrowers are persons associated with the Company.
B.   Both parties wish to formally record the terms and conditions of all future and past borrowings made by Borrower from the Company.
 
DEFINITIONS:
 
Amalgamated loan means the total of all the loans made under this agreement that are made in a particular year of income and are not repaid by the end of that year.
 
Associate means what it means in Division 7A of the Income Tax Assessment Act 1936.
 
Loan means any of the following:
·   an advance of money
·   a provision of credit or of some other financial accommodation
·   a payment of an amount for or on behalf of or at the request of the borrower where there is an express or implied obligation to repay the amount
·   a transaction which in substance effects a loan of money.
·   it includes any of these that is deemed to have been made under the Income Tax Assessment Act 1936.
 
It has been agreed as follows:
 
 
1.   THE LOAN:
a.   Acknowledgement
The Borrower acknowledges that the Company has lent to Borrower the sum of Dollars_______________($__) (the “Loan”) on ________[Mention date].
 
b.   Loan at Companys discretion
Company may make one or more loans to the Borrower.  This Agreement applies to all loans made by the Company to the borrower, except loans to which the Company and the Borrower agree that this Agreement is not to apply.
 
c.   Interest on loans
Effective from 1 July after a loan is made by the Company, the Borrower must pay interest on the outstanding amount of that loan at the Benchmark Interest Rate as defined in the Income Tax Assessment Act 1936.
 
d.   Minimum annual repayment
In relation to each amalgamated loan, the Borrower must make annual repayments by 30 June each year that are at least the minimum yearly repayments as defined in section 109E(5) of the Income Tax Assessment Act 1936.
 
e.   Repayment of loan and interest
The Borrower must repay each loan to the Company, in addition to all interest that remains unpaid on it, no later than 7 years from the date the loan is made or is deemed by the Income Tax Assessment Act 1936 to have been made.  The Borrower may repay any part of a loan, and any interest on a loan, before that date.
 
If this Loan is unsecured, the Borrower should repay on or before such a date as provided under Division 7 A of the Income Tax Assessment Act 1936 upon which an unsecured loan to a Borrower must be repaid in order for it not to be treated as dividend.
 
f.   Capitalising interest
The Company may capitalise any unpaid interest that has become due.  That interest is then to be treated as having been added to the amount of the loan as from the date it became due.
 
g.   Company may require security
The Company may at any time require the Borrower to provide reasonable security for the performance of his obligations under this Agreement.
 
h.   Costs
The Borrower must pay the Company the costs it reasonably incurs in connection with this Agreement and any security the Borrower offers or provides under it. This includes stamp duty.
 
 
2.    DEFAULT
a.   Immediate Payment of Loan and Interest
The Company may elect to treat all loans made to the Borrower under this Agreement, and any unpaid interest that has accrued, as payable automatically and immediately if any of the following happens:
 
-   The Borrower fails to pay an amount in accordance with this Agreement.
-   The Borrower assigns any of his property for the benefit of creditors or any class of them.
-   The Borrowers interest in or under this Agreement is attached or is taken in execution under any legal process.
-   A mortgagee or person with a similar legal interest in any of the Borrowers assets takes possession of them or takes a step in that direction, or exercises a power of sale over them.
-   The Borrower ceases to conduct or suspends the conduct of a major part of its business, or threatens to do so, except for the purpose of a solvent reconstruction or amalgamation that has been approved by the Company.
-   The Borrower, being a Company, disposes of its assets, or threatens to do so, except for the purpose of a solvent reconstruction or amalgamation that has been approved by the Company.
-   A security interest becomes enforceable or is enforced against the Borrower.
-   A distress, attachment or other form of execution is levied or enforced against the Borrower for more than $1,000.
-   The Borrower takes any step to obtain protection under legislation against his creditors, or is granted that protection.
-   The Borrower commits an act of bankruptcy or becomes insolvent.
-   The Borrower passes a resolution to appoint an administrator or an administrator of the Borrower is appointed.
-   An order is made that the Borrower be wound-up.
-   An order is made appointing a liquidator or a provisional liquidator of the Borrower.
-   An order is made or a resolution is passed for the Borrower to enter into any arrangement, compromise or composition with or assignment for the benefit of its creditors or any class of them, except for the purposes of a solvent reconstruction or amalgamation previously approved by the Company.
-   The Borrower is, or states that it is, or under applicable legislation is taken to be, unable to pay its debts (except as a result of a failure to pay a debt or claim that is the subject of a dispute in good faith) or stops or suspends or threatens to stop or suspend payment of all or a class of its debts.
-   A receiver, receiver and manager, administrator, controller or similar officer of any of the assets or the whole or any part of the undertaking of the Borrower is appointed.
-   The Borrower is or makes a statement from which it may be reasonably deduced by the Company that the party is the subject of an event described in section 459C(2) of the Corporations Act 2001.
-   An event occurs that is analogous or having a substantially similar effect to any of the events specified in this clause occurs.
3.   MISCELLENEOUS
 
a.   Method of payment
The Company may inform the Borrower in writing that Borrower is required to make payment under this agreement in a specified way.
 
b.   Joint and individual liability
Where the Borrower is comprised of more than one person, the obligations imposed on a borrower by this document are imposed on those persons individually as well as jointly. A breach by any of them is a breach by all of them.
 
c.   Waiver
The failure of Company at any time to insist on performance of any provision of this Agreement is not a waiver of its right at any later time to insist on performance of that or any other provision of the Agreement.
 
d.   Variation
The parties can only vary this agreement in writing.
 
e.   Severability
If any provision of this Agreement is held by a Court of competent jurisdiction to be invalid, void or unenforceable, it will be severed from it and the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way.
f.   Jurisdiction
This Agreement is governed by the law of the jurisdiction in which the Company was incorporated. Each party submits to the jurisdiction of the courts of that jurisdiction.
 
[Signature Page Follows]
 
 
Executed as a deed.
 
Dated: _________________________.
 
 
Signed for Company: _________________________.
 
Title: _________________________________
 
 
 
Borrower/s: _________________________.
 
Title: _________________________________
 
Witnessed by: _________________________
 
Full Name of Witness: ________________________
 
Signature: ________________________________
 
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