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Recognised Liabilities of a Controlled Private Company or Trust

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Last amended: 8 September 2011

Recognised liability – loan and debt

Loans to or debts owed by an entity will be recognised as a genuine liability of the entity and therefore allowed as a genuine deduction from the gross asset value of the borrowing entity if:

  • they appear on the balance sheet,
  • they are made under a written agreement signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties),
  • they are not made by a person who is under 18 years of age, and
  • considering the circumstances, and nature of parties to the loan, the loan can be considered to be genuine and not created as part of a scheme to gain an income support pension advantage.    

Documentation substantiating liabilities may be required where the person is attributed with less than 100% control of the private company or trust and there is any doubt about whether the liability is genuine.     

Recognised liability – provisions

Provisions made by an entity to meet other known liabilities, such as a tax obligation or accumulated employee leave, represent another party's legal interest in the asset value of the entity and so may also be deducted from the asset value of the entity which is attributable to the pensioner.

Treatment of a recognised loan and debt

Regardless of whether a loan is recognised as a liability of an entity or not, the value of the loan is considered to be a personal financial asset of the lender and is subject to the deeming provisions.

Level of reasonable interest payable on a loan or debt

Reasonable interest paid on loans will be accepted as a genuine deduction from the income of the entity, regardless of whether the loan is recognised or not, as long as the loan appears on the balance sheet and is listed as an expense on the profit and loss statement. Together these documents provide evidence of the loan and any expenses that relate to it.

The current commercial interest rates would be reasonable for commercial loans. For non-commercial loans, an interest rate of no more than 10% will be accepted as reasonable. Where the person receiving the interest is not the 100% attributable stakeholder, the staff member must be convinced that there is a risk involved before accepting an interest rate greater than 10% ie the company is in trouble and borrowing from a 'lender of last resort'. If the person is however the 100% attributable stakeholder, there are no concessions for interest rates above 10%. Loans from associates or associated entities would be considered to have a nil risk factor.

Secured loan

Loans secured against a specific asset(s) of an entity can only be offset in relation to the asset(s) against which the loan is secured.

Example of effect of a secured loan on entity assets

A trust has assets totalling $580,000. The assets consist of a farm worth $500,000, which includes the principal home of the sole attributable stakeholder worth $100,000, and a holiday home worth $80,000. A liability of $100,000 is secured against the holiday home. Only $80,000 of the loan would be recognised as a liability. The excess $20,000 would not be recognised as a liability of the trust. Therefore the net attributable asset amount of the sole attributable stakeholder is $400,000 (total assets less the value of the principal home less the recognised liability). However, an exception applies if the $100,000 liability were a Primary Production liability. The excess amount of $20,000 would then be included when calculating the Primary Production aggregation amount. If the loan is secured against all the assets of the entity the loan must be apportioned before determining the net attributable asset amount.    

Unsecured loan and floating charge

    

VEA ?

Effect of unsecured loan on the value of assets

Section 52ZZU VEA

VEA ? (go back)

Unsecured loans or loans secured by a 'floating charge' over all entity assets will be recognised as a liability of an entity if they are:

  • made under a written agreement signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties), and
  • are NOT made by a person(s) who is under 18 years of age.
Rules for 100% attributable stakeholder

    

VEA ?

Attribution of Assets

Section 52ZZR VEA

VEA ? (go back)

Liabilities in respect of a person attributed to be in “100%” control of a private trust or company will be allowed provided that they appear on the entity's balance sheet. Documentation of these loans is not required.

Loans by a trust to an attributable stakeholder

A loan by a trust to an attributable stakeholder may have an unforeseen consequence. The loan becomes an asset of the trust, however it cannot be offset by the borrower (stakeholder) unless it is a secured loan, or unsecured but recorded in writing and witnessed by an independent third party.

If the loan cannot be offset the amount is maintained twice – once as an asset of the family trust and again as an asset of the stakeholder borrower.

Recognised financial institution

Liabilities in relation to financial institutions, banks and finance companies are to be allowed and will be considered adequately documented provided that the liability appears on the balance sheet. Further documentation such as a loan agreement or loan statement need only be requested if the assessor has doubts about the accuracy of the information provided on the balance sheet.


An entity means any of the following:

an individual,

a company,

a trust,

a business partnership,

a corporation sole,

a body politic.

Control includes control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights.

According to section 5J(1) of the VEA a financial asset means;

 

An asset means any property, including property outside Australia.

The principal home has the meaning given by subsection 5LA(1) of the VEA and subsection 5LA(2) of the VEA. The principal home of a person is generally the place in which they reside. In certain circumstances, however, the principal home of a person can be the place in which they formerly resided. The following property is regarded as part of the principal home.

  • the residence itself (e.g. house, flat, caravan),
  • permanent fixtures (e.g. stoves, built-in heaters, dish-washers, light fittings and affixed carpets),
  • [glossary:curtilage:DEF/Curtilage] (i.e. two hectares or less of private land around the home where the private land use test has been satisfied, or all land held on the same title as the person's principal home where the extended land use test has been satisfied), or
  •       any garage, shed, tennis court or swimming pool used primarily for private purposes provided it is on the same title as the principal home.

 

 

According to section 52ZZJ of the VEA, a person is an attributable stakeholder if a company or trust is a controlled private company or trust in relation to the individual unless the Commission determines otherwise.

 

 

An entity means any of the following:

an individual,

a company,

a trust,

a business partnership,

a corporation sole,

a body politic.

An associate of an individual for the purposes of private trusts and private companies has the meaning given by section 52ZQ of the VEA.