Contact: Gavin Clancy
Deloitte
Communications Manager
+61 3 9208 7759

Contact: Jane Kneebone
Deloitte Touche Tohmatsu
National Communications Manager
0416 148 845

Contact: Kel Fitzalan
Deloitte
Tax Principal
+61-2-9322 5331

Businesses should move now to review their related party and ‘at call’ loans in the wake of proposed tax changes unveiled by the Federal Government, according to Deloitte.

The Government has foreshadowed changes to the application of debt/equity tax rules to ‘at call’ loans, which are popular in the small to medium business (SME) sector. Transitional arrangements, which presently treat related party loans as debt interests, will end on 30 June this year.

Deloitte says from this date, ‘at call’ loans are likely to be treated as equity for income tax purposes, and any subsequent payments of interest will be non-deductible, although frankable.

“Essentially, many private companies will want to retain the benefits afforded by being able to claim interest on ‘at call’ loans, rather than paying out dividends on equity,” said Deloitte Tax Principal Kel Fitzalan.

Mr Fitzalan said one practical way in which small businesses can ensure such loans were not treated as equity would be to limit the term of the loan to less than 10 years.

“This approach would give it the genuine status of debt, rather than the loan being interpreted as equity by the tax rules,” he said.

In addition, Mr Fitzalan said small business would also need to remain vigilant against the application of so-called section 45B to the repayment of ‘at call’ loans.

S45B could effectively treat repayments on such loans as unfranked dividends where that repayment was in substitution of a dividend.

“The provision also provides a franking debit to the company’s franking account and where the account goes into deficit, the company may also be up for franking deficits tax,” Mr Fitzalan said.

“The combined effect of s45B and the debt/equity measures are that companies could be subject to a ‘profits first rule’ by stealth, with the added penalty of being unable to frank the dividend and being subject to penalty tax.”

Mr Fitzalan said the ‘Profits first rule’ was an unsuccessful initiative introduced by the Federal Government some years ago in an attempt to tax shareholders on returns of capital where the paying company had profits at that time.