Small business will get a carve-out from the debt/equity tax rules for related party ‘at-call’ loans to help reduce compliance costs and red tape, Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, announced today.
Transitional arrangements which treat ‘at-call’ loans as debt for income tax purposes end on June 30, 2004. After this date, such loans may be classified as equity interests for tax purposes.
“During public consultation on how the debt/equity rules should apply to these loans going forward, small business expressed concern about the disproportionate compliance costs associated with formalising loan arrangements for these commonly used loans, given their small risk to revenue,” Senator Coonan said.
“This carve out from the debt/equity rules will reduce unnecessary compliance costs for a large number of small businesses using at call loans by generally removing the need to put formal loan agreements in place or maintain non-share capital accounts.
“To provide additional certainty for business, the existing transitional rules will also be extended to related party at call loans entered into on or before 30 June 2005. This will give business extra time to assess existing loans and adjust their arrangements, if need be, in light of the above carve-out decision.
“Both measures will address small business red tape concerns while maintaining the integrity of the debt/equity tax rules.”
Related party ‘at call’ loans generally don’t have a fixed term and may be repaid if and when the company is able to. Interest payments may also fluctuate as determined by the parties from time to time.
The carve-out will ensure that where a company to which the related party loan is made satisfies a combined maximum net assets value test and an interest deductibility cap at the end of an income year, the loan will be excluded from the debt/equity tax rules in that year.
The maximum net asset value test is consistent with that used for the small business CGT tax concession. The concession is limited to those companies who, together with their related entities, have CGT assets with a net value that does not exceed $5 million. Where the amount of any deductions in respect of the loan in that year does not exceed $100,000, the interest deductibility cap will be satisfied.
Technical details of the carve-out will be developed in consultation with interested parties.
Media Contact: Jane McMillan (02) 9223 4388 or 0438 690 305