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Australian Lawyers and Consultants

When Credit Loans in Companies can be treated as Equity rather than Debt

January 2003

The Minister for Revenue Assistant Treasurer Senator Helen Coonan announced on 16 December 2002 that the transitional period for retaining the current taxation treatment of interest on credit loans of shareholders and associates, will be extended to 30 June 2004.

In effect, the significance of this announcement is that it confirms that the interest on such loans may continue to be tax deductible notwithstanding the new Debt/Equity rules.

The significance of classifying a loan as either debt or equity is that if the loan is classified as equity, payments of “interest” will be non-deductible and may be frankable.

Credit loans to companies must have no more than a ten (10) year maximum period for repayment, in order to retain their status as a debt instrument and thereby not precluding tax deductibility of interest paid on the loan. If the interest is not deductible because the loan is treated by the Australian Taxation Office as equity instead of debt, the non-deductible payment will be deemed an unfranked dividend – which can be a more costly franking expense than a tax deductible interest payment or alternatively, a franked (i.e. tax imputed) dividend.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

Return to the Corporations Law Archive or Australian Tax Law Archive.