What is a Loan to Company agreement document?
The question that no business owner wants to ever hear is, Was this a 'loan to the company' or 'was it an injection of equity', and 'where have you documented that'?
A Loan to Company Agreement is a legal document designed to make a clear distinction between what's considered a loan to a company, and what is an injection of equity, into a company.
The ATO has a set of tax rules about Equity Injections v Loans that started on 1 July 2001, called the Debt and Equity test.
Pro Tip: If money moves from you to your company the default position is that it is an injection of cash. It is not a loan. Undocumented money into a company is treated as an injection of cash as equity. Not as debt.
Important for Partnerships (especially Undocumented Partnerships)
This distinction between a repayable loan and a non-repayable injection of equity is particularly important for Business Partnerships, as some partners may anticipate any cash they 'lent' to the business over time, will be repayable to them when they exit the partnership (or will reduce the purchase price if they buy out their partner later).
The other business partner may assume all money brought into the company to help with cash flow was only an equity injection; and therefore not repayable ever. This has tax planning considerations and can affect the valuation of a business, so start speaking with your Accountant to learn more about your position.
Associated reading:
Documents may need to be refreshed after a set period of time (different in each state)
Company loans ‘expire’ every 6 years so there is a risk that over time it stops working. In Australia, each State and Territory has a Statute of Limitation and your loan to a company goes ‘stale’ or ‘expires’ if no repayments are paid or none are demanded.
The Loan to Company limitation periods for each Australian State and Territory for unsecured loans are:
- Australian Capital Territory: 6 years
- New South Wales: 6 years
- Northern Territory: 3 years (the odd one out)
- Queensland: 6 years
- South Australia: 6 years
- Tasmania: 6 years
- Victoria: 6 years
- Western Australia: 6 years
So in the Northern Territory, business owners need to diaries every two years to build a Deed of Recognition of a Loan.
For all other jurisdictions, you have 6 years before your Company Deed of Loan is barred by the statute of limitation. In that case, diarise every 5 years to re-build a Deed of Recognition of a Loan. And sign it to freshen it up before the 6 year period. It starts the 6 year period running again.
Why documenting a loan to a company needs to be clear (and Not an IOU on the back of an envelope)
Company Deed of Loan on the back of an envelope - surely not?
In the movies, (and nightmares of accountants and bookkeepers) 'IOUs' are often handwritten and on the back of an envelope. Sometimes, instead of a Deed of Loan Agreement, someone documents a company internal ‘minute’, and files it away, somewhere. Both fail. Read the case of Rowntree below.
Case Study Rowntree v FCT
The case of Rowntree v FCT [2018] FCA 182 shows the additional care required to document even simple related-party transactions. This includes loans.
In this case, the taxpayer, a practising NSW lawyer, claimed he borrowed over $4m. This is from his group of private companies. The Court said:
‘Mr Rowntree has not deliberately chosen to ignore the law. His evidence presented to the Tribunal suggests that he genuinely believed that there were arguments to support his view that a loan was in existence.
He failed. Only a legally prepared Deed of Loan of a company satisfies the:
- Australian Taxation Office
- Bankruptcy Courts, and
- Family Court
How we can help
Loan to Company Agreements are an important part of protecting the safe return of money lent to your company.
- We can supply this legal document,
- We can advise on How to Insure the Business Debt and Owners Account from unsuspected Death or Disability
Contact us for a confidential chat about your needs.
Related: Key Legal Documents for Business Owners
- Non-Disclosure Agreements (NDA)
- Company Power of Attorney (CPO)
- Partnership Agreements
- Shareholders Agreement
- Unitholders Agreement
- Loan to Company Agreement
