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SHAREHOLDER LOAN CLAUSE

Section 109D(1) of the Income Tax Assessment Act operates to treat a loan made by a private company to a shareholder or associate as a dividend.

However, section 109N provides that if the loan is made under a written agreement and the rate of interest paid and maximum term meet specified conditions the loan is excluded from being treated as a dividend.

Section 140 of the Corporations Act 2001 provides that the constitution of a company has effect as a contract between the company and each member. The 'loan clause' relies on this section to be accepted as a valid written agreement for the purposes of section 109N of the Income Tax Assessment Act.

It sets out a procedure for establishing the rate of interest, minimum repayments and maximum term which mirror the provisions of section 109N.

In relation to the clause please note the following:

1.  At the time this information sheet was last updated (01/07/06) Taxation Determination TD 2004/86 in relation to ‘shareholder loan clause’ was current, and can be found on the ATO website www.ato.gov.au
2. The clause only applies to loans between the company and its members. Accordingly, the clause cannot apply to loans made to an associate of a member (who is not themselves a member), to former members or to a director who is not a member. However, it will apply to a person who ceases to be a member provided that they were a member when the loan was made.
3. To ensure that the clause will be binding on members when loans are made, each new member should consent to the application of this clause on becoming a member of the company whether as an initial member, applicant for new shares or transferee of existing shares.
4. The clause is subject to any other agreement in writing with the member.