Company Loan Facility Agreement - only Division 974, no Division 7A
Often shareholders in small private companies provide funds to the company for working capital, or generally to allow the company to survive and hopefully grow.
The advances are done on a very informal basis, with the company receiving money with little, if any, documentation and no obligation to pay interest. Invariably the funds will only be repaid if and when the company is able to, and to the extent that the shareholder(s) demands repayment.
These loans are called, at-call loan arrangements and have been specifically addressed by Division 974.
Division 974 contains the principal legislative rules that are used to determine whether a loan amount is a debt or equity interest for tax purposes. Rather than allow the circumstances of your transaction dictate whether the ATO will determine it to be a debt interest (in which case the Company will be entitled to treat interest payments as a deduction and the recipient will be required to declare the interest as income) or an equity interest (in which case the Company is required to keep a non-share capital account and the payment of interest on the loan will not be deductible, but may be frankable), specifically address the issues in your loan documentation. This is what Clause 12 of the Company Loan Agreement does - it sets up any loan/advance as a debt interest.
This agreement, which is a loan facility, provides that each advance that may be made by a shareholder or associate to the company, is to be repaid within ten years of the advance being made. The agreement also provides for interest to be paid at the same rate as interest under section 109N of the Tax Act (the benchmark rate of interest).
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