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
Effect of unsecured loan on the value of assets
Section 52ZZU VEA
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
Attribution of Assets
Section 52ZZR VEA
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.