There is legislation to prevent companies from ‘loaning’ money to associates, known as Division 7A. Ensuring that your business is fully compliant with the various requirements of Division 7A legislation is vital. Being compliant not only involves ensuring that all minimum repayment requirements are met, but also having the correct documentation in place.
There are a number of agreements available to effectively document these ‘loans’ including the documentation of situations in which dividends are used to offset Minimum Yearly Repayment (MYR) requirements. Documentation is vital as journal entries alone will not suffice in effecting these set-off arrangements.
A ‘Deed of Assignment and Agreement for Set-Off’ is one such agreement that has been designed based on the following assumptions:
- A company has a complying ‘loan’ with a trust;
- The Trust is not a shareholder of the Company;
- The Company has declared (but not paid) a dividend to its shareholder; and
- The amount of the unpaid dividend is equal to or greater than the amount of the MYR required to be made by the Trust.
Firstly, the Deed generates an agreement between shareholder and Company to treat the amount of the unpaid dividend as a loan receivable. The right to collect this receivable from the Company is then re-assigned by the shareholder to the Trust. As a result, there are now two mutual and matching obligations which can be offset:
- The Trust is required to make the MYR to the Company; and
- The Company will be required to pay an equal amount, representing the receivable, to the Trust.
These mutual obligations are then set-off against one another.
Consideration should always be given to the taxation and legal consequences of any arrangement specific to your individual circumstances.