A loan will be a complying 25 year loan under Division 7A if the requirements in section 109N are satisfied. In summary, these requirements are as follows:
- The loan must be pursuant to a written agreement entered into before the due date for lodgement of the company tax return for the year in which the loan is made (or refinanced if a 7 year loan is converted to a 25 year loan).
- The loan must be secured by a registered mortgage over real property.
- When the loan is first made (or refinanced) the market value of that real property must be at least 110% of the amount of the loan.
The legislation is silent as to what, if any, consequences arise if the property (or properties) over which the loan is originally secured is changed. This could occur in a number of ways including if:
- there are multiple properties securing the loan and one or more of those properties is released from the mortgage; or
- the existing mortgage is released and replaced with another mortgage on the same terms but over different properties.
Cooper Grace Ward have recently obtained several private rulings from the ATO confirming that releasing some of the properties secured by the mortgage or substituting mortgages over new properties will not trigger any deemed dividend under Division 7A provided that:
- the market value of the properties at the date the loan was originally made or refinanced and at the date that the change occurs it is not less than 110% of the amount of the loan; and
- the terms of payment for the loan are not altered in any way.
The position adopted by the ATO in these private rulings is not unexpected given that the underlying policy of the legislation is simply to ensure that 25 year loans have adequate real property security and it should not really matter whether the identity of that property changes over time.
However, this uncertainty in the legislation has been a practical problem for a number of clients seeking to refinance their loan arrangements and the practical approach taken by the ATO is welcome.