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Having a Division 7A loan agreement in place is a way of safeguarding yourself against paying extra taxes on dividends. Not only can it save you tax dollars, but it can protect the company too and save you costly lawyer fees later down the road.
Take a look at how to draft your own Division 7A loan agreement and where to find a free template to download.
What's in this guide?
- What is a Division 7A loan agreement?
- When should I use a Division 7A loan agreement?
- What does a Division 7A loan agreement include?
- What's included in a Division 7A loan agreement?
- How effective is a Division 7A loan agreement?
- Do I need a lawyer for a Division 7A loan agreement?
- Get access to customisable Division 7A loan agreement templates online
- How do I write a Division 7A loan agreement?
- Where to get free Division 7A loan agreement templates
What is a Division 7A loan agreement?
A Division 7A loan agreement is a legal document required of private companies (Pty Ltd) to prevent them from making tax-free profits by distributing funds to their shareholders and associates. Payments, loans and forgiven debts are all subject to a Division 7A loan agreement.
Download this Division 7A loan agreement template at Lawpath
When should I use a Division 7A loan agreement?
You should use a Division 7A loan agreement if you're a private company and want to loan money to a shareholder or associate.
A Division 7A loan agreement can save you money in taxes because without it, payments, loans and debts incurred by the company would fall under assessable income for that tax year.
You should use a Division 7A loan agreement for the following:
- Any kind of money advance
- Financial assistance or benefit known as a provision of credit
- Any kind of financial accommodation to shareholders and associates
- Transfer of funds to a shareholder or their associates
- Any kind of money loan
What does a Division 7A loan agreement include?
In order for a Division 7A loan agreement to be legally binding, it must be compliant and include information relating to the lending of funds.
What's included in a Division 7A loan agreement?
- Must be in writing
- Must use defined terms and definitions (legal standard language)
- Details of the lender and borrower
- Exact terms of the loan agreement
- Identify the Interest rate (benchmark or higher)
- List the terms of the loan
- Set out the terms of repayment (no longer than 7 years unless secured by real property)
How effective is a Division 7A loan agreement?
A Division 7A loan agreement is only effective if it's set out in defined legal terms and complies with the provisions of the Australian Tax Office (ATO).
Without a Division 7A loan agreement, your payments, loans and forgiven debts would be treated as a dividend and subject to income tax.
Having a Division 7A loan agreement in place can help with the following:
- Protects you from paying additional income taxes
- Stops companies from profiting from tax-free benefits
- Clearly identifies the responsibilities of lender and borrower
- Has tax-saving benefits for the company
- Less chance of legal and liability issues
Do I need a lawyer for a Division 7A loan agreement?
When money is involved, the prudent thing to do is always consult with a lawyer. You want to make sure your Division 7A loan agreement is legally binding and in compliance with the law.
A good starting point and to save you money in lawyer fees is to download a free template of a Division 7A loan agreement. Fill it out, date and sign it and get a lawyer to look it over.
Get access to customisable Division 7A loan agreement templates online
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How do I write a Division 7A loan agreement?
Before you start, do some research online and go to sites like the ATO and read up on Division 7A loan agreements. From there you'll have a good idea of what to expect, so when you download your free Division 7A template, it will make more sense.
Next, you need to sit down with all parties involved and draft up the terms and conditions of the loan agreement, making sure it's 7A compliant. After that, take the document to a lawyer to see if there are any mistakes or omissions.
Where to get free Division 7A loan agreement templates
There are number of free online templates available for Division 7A loan agreements and some that let you view the document, including:
- Lawpath. Lawpath is an online legal resource for small businesses and entrepreneurs. You can view samples of legal document templates for free, but a fee is required for access to downloads and customisable options.
- LegalVision. For a monthly membership to LegalVision of $199, you'll get unlimited access to free downloads of legal document templates (includes the Division 7A loan agreement).
- Cleardocs. Cleardocs is a division of Thomson Reuters that offers hundreds of legal and business document templates to download for a one-time fee. The Division 7A loan agreement template is downloadable for $93.50.
- Law Central. Law Central is a hub of information in law and business. It offers a 3-tiered membership plan, as well as one-time fee downloads. The Division 7A loan agreement template is downloadable for $55.
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