Amounts which Division 7A would deem to be a dividend, will avoid that result, if they are recorded as a s109N complying loan, prior to the private company lodging its return, for the year in which the payment, or loan, was made to the shareholder/associate. There is a minimum interest rate for such loans, known as the ‘benchmark interest rate’ which will be 4.52% for the 2021-22 year (unchanged from the year prior).

See below for further details.

[Tax Month – June 2021]

 


 

Division 7A (of Part III of the ITAA36) is a regime for deeming payments and loans to shareholders and their associates, to be dividends (usually unfranked), unless they are recorded as a loan on commercial terms, set out in s109N. One of the necessary terms is the loan accrues interest at a rated equal or higher to the ‘benchmark interest rate’. This is defined in s109N(2) as follows.

102N(2)      The benchmark interest rate for the year of income is the Indicator Lending Rates – Bank variable housing loans interest rate last published by the Reserve Bank of Australia before the start of the year of income. However, the benchmark interest rate is the rate worked out under the regulations, if they provide for working it out.

Note, the interest rate is set before the start of the next income year.

So, in this case, the rate is expected to be 4.52% for the 2021-22 income year (unchanged from 2020-21).

This is the “Indicator Lending Rates – Bank variable housing loans interest rate” (being the rate published by the Reserve Bank, on 2 June 2021, for the month of May 2021). This will be last such ‘indicator rate’ published before 1 July 2021 (that is prior to the start of the 2021-22 financial year).

The ATO no longer issues annual Taxation Determinations for the benchmark interest rate. However, it will confirm the benchmark interest rate for 2021-22 at some stage on its Website (search ref: QC 17928).

[LTN 115, 18/6/21]

 

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