How to Build a Div 7A when the borrower is a Family Trust

Why do I need a Div 7A when the borrower is a Family Trust?

A Division 7A Loan protects loans from your company to a shareholder or 'associate'. Your Family Trust is an 'associate'. Your Family Trust must have its own Div 7A Deed. This is how to build a Div 7A when the borrower is a Family Trust:

1. Lender: the company lending the moneyDiv 7A when the borrower is a Family Trust
2. Borrower: the Trustee of the Family Trust borrowing the money

1. Example when the Trustee of the Family Trust is a company:

1. Lender: Generous Pty Ltd (this is the company lending the money)
2. Borrower: Abacus Pty Ltd as trustee of the Smith Family Trust

2. Example when the Trustee is a single human

1. Lender: Generous Pty Ltd (this is the company lending the money)
2. Borrower: Colin James Smith as trustee of the Smith Family Trust

3. Example when the Family Trust's Trustee is two humans

1. Lender: Generous Pty Ltd (this is the company lending the money)
2. Borrower One: Jake Chen James as trustee of the Smith Family Trust
3. Borrower Two: Mary Chow James as trustee of the Smith Family Trust

 

Why build a Div 7A when the borrower is a Family Trust?

By building a Div 7A, the loans by the company to the Family Trust are not classified as dividends and don't suffer penalty interest rates. These rules are set out in Division 7A of the Income Tax Assessment Act 1936 (Cth).

A requirement of a Div 7A Loan Deed is that the Family Trust (borrower) repays 1/7th of the loan each year, as well as interest rate set by the ATO.

Why did the government make this law?

Companies pay a low flat tax rate of 30% or less. In contrast, mum and dad pay up to almost 50% in tax. Therefore, in the good old days (before Div7A) mum and dad would:

1. have the company earn the income and pay the low tax rate
2. the company then lends mum and dad the money
3. mum and dad buy a boat, have a holiday or whatever with the money
4. mum and dad never bother to pay back the debt
5. therefore, mum and dad never bother to pay the difference between the low company tax rate and the higher tax rate that mum and dad would of have to have paid if they had earned the money

The government got sick and tired of this. It introduced Div 7A. Now, mum and dad need a proper commercial loan deed. This is called a 'Div 7A Loan Deed'. Plus mum and dad have to pay back the money that the company lent them.

What is the purpose of Div 7A?

Div 7A ‘ensures that private companies will no longer be able to make tax-free distributions of profits to shareholders (and their associates) in the form of payment or loans’: Explanatory Memorandum to Act No 47 of 1998. Further:

‘It ensures that all advances, loans and other credits by private companies to shareholders (and their associates), are treated as assessable dividends. This is to the extent that there are realised or unrealised profits in the company. In addition, debts owed by shareholders (or associates) which are forgiven by private companies are treated as dividends.’

What has this to do with Family Trusts?

Family Trusts earn money each year. The Family Trust hunts down beneficiaries with the lowest marginal tax rate. Often the Family Trust distributes to a company. This is because the company pays a low fixed rate of tax.

The Family Trust then 'distributes' income to the company beneficiary. However, as is commonly the case no money actually changes hands. The Family Trust merely has an obligation to pay the money to the company. This is called a 'present entitlement' and is enough to have the company pay the tax (at its low tax rate). This obligation use to be called a 'loan' from the company back to the Family Trust. But now we call them a much fancier name: 'Unpaid Present Entitlement' (UPE).

You need to build a Div 7A Deed between the company (as Lender) and the trustee of the family trust (as Borrower).

Why not just use the name of the Family Trust as the Borrower?

Trusts only operate through a trustee. The Borrower is the 'Trustee' of the Family Trust.

What if the Trustee of the Family Trust also borrows money in her own right?

Let's say mum is the trustee of the Family Trust. The Family Trust borrows money. Mum also borrows money from the company to buy a new necklace. You need two separate Div 7A Deeds. You need a separate Div 7A when the borrower is a Family Trust. Then you need a separate Div 7A for mum, as well.

What do I get?

Build the Div 7A online. You get:

  • Division 7A Loan Deed
  • Minutes
  • Our law firm’s letter of advice on our law firm’s letterhead and signed by one of our Partners

Why is it better to prepare my legal document on a law firm’s website?

You are dealing directly with a law firm’s website, therefore you:

  • retain legal professional privilege,
  • benefit directly from the law firm’s PI insurance, and
  • receive legal advice from us.

You are supported by our 100% money back guarantee on every document you build.

For more legal advice on building a Div 7A when the borrower is a Family Trust contact us.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm

Toll-free: 1800 14 16 12Div 7A when the borrower is a Family Trust
Mobile: 04777-96959

Email: brett@legalconsolidated.com
Skype: brettkennethdavies

See also:

Div7A Loan Deed

Divorce Division 7A

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