The term loan account is very broad and often used to cover multiple scenarios, which can sometimes make it difficult to grasp.
Very generally, this would represent the amount that the company owes you as a shareholder or director, and/or the amount you owe the entity. Additionally, although they are not loans in the technical sense, trust beneficiary accounts are sometime colloquially called loans also.
The loan account could be made up of amounts you have loaned the company or it has loaned you, expenses it has paid on your behalf (or vice versa), profits credited to you that haven’t been withdrawn (to assist in funding operational activities perhaps), contributions towards fringe benefits, just to name a few.
“Credit” loan accounts (these sit under the Liabilities section on the balance sheet) represent the amount that the company owes the director/shareholder. This represents what the company will repay you at some time in the future (assuming solvent). There is no necessity for the entity to repay this loan under tax law, however it may be wise to repay the loan owing to you rather than be an unsecured creditor of the company.
“Debit” loan accounts (these sit under the assets section on the balance sheet) represent the amount that the director/shareholder owes the entity back. These type of loans can have some requirements associated with them under tax law. When amounts are drawn from a company and the net of the amounts drawn over the year result in a “debit loan”, specific tax law provisions kick in – Division 7A of the ITAA, commonly called “Div 7A”.
When properly understood and managed, a debit loan account isn’t necessarily a cause for concern. Even though these rules are directly associated with companies, they can apply to certain types of loans between companies and trusts and also loans by a trust to related parties in certain situations (this is often overlooked!)
So, what do you need to do in relation to loans?
If you are required to action to take in relation to loans, your C&N Advisor will discuss this and guide you through the recommended management of the loan, which might mean actions such as repayment, a loan agreement or paying out profits to you.
The key thing that you can do to ensure that your loan is managed effectively is to regularly review the transactions recorded against your loan / drawings account to ensure that they are indeed personal. This is recommended to be undertaken regularly, so that any errors are corrected while the transaction is fresh in your memory. This can assist your advisor in managing your loan accounts when planning with you at year end.
The team at Cutcher & Neale are here to help, please get in touch if you would like further assistance.
