ATO Scrutinising Loan Guarantees Under Division 7A
The ATO has released Draft Determination TD 2024/D3, clarifying how section 109U of the ITAA 1936 applies when a private company guarantees a loan made by another entity.
How Section 109U Works
A private company may be treated as making a payment or loan to a shareholder (or their associate) if:
- It guarantees a loan given by another entity;
- The guarantee is part of an arrangement aimed at providing funds to the shareholder;
- Another private company provides the actual payment or loan to the shareholder; and
- The amount loaned exceeds the private company’s distributable surplus.
Importantly, the original lender doesn’t have to be a private company—even if a bank or financial institution provides the loan, section 109U may still apply if a private company ultimately provides the funds.
ATO’s Warning on Avoidance Schemes
The ATO is also cracking down on schemes designed to get around Division 7A. Some concerning arrangements include:
- A private company guarantees a loan from a bank to a related company with little or no distributable surplus.
- That related company then on-lends or pays the money to shareholders on non-compliant terms.
Some taxpayers wrongly believe section 109U only applies if the original lender is a private company—but the ATO has made it clear that what matters is where the money ends up.
Potential Tax Consequences
If an arrangement is found to avoid Division 7A, the ATO may:
- Deem an unfranked dividend to have been paid to the shareholder.
- Apply anti-avoidance rules (Part IVA) to cancel any tax benefits.
What This Means for You
If your company is involved in loan guarantee structures, it’s important to review them to ensure they comply with Division 7A. Seeking professional advice can help you avoid unexpected tax consequences.
Need help?
Simmons Livingstone can guide you through Division 7A rules. Contact us today to ensure your arrangements meet ATO requirements at 1800 618 800 or via email admin@simmonslivingstone.com.au.
