Liabilities - loan or debt

Liabilities can include loans that have been made to a trust or company [2] or debts owed by a trust or company. Loans can be from controllers, associates [2] or a third party. Loans can also have been made by another trust or company or debts can be owed by the entity [2] to another trust or company. Liabilities on the balance sheet can generally be deducted from the value of assets to determine the assessable value of a trust or company subject to the exceptions in this section.    

Non-recognised loan and debt

Circumstances where a loan to or debts owed by an entity will not be recognised as a liability of that entity are:

• where no written agreement exists which is signed by all parties to the agreement and witnessed by a third party (associates [2] are not considered to be third parties), and
• loans from, or debts owed to, a person who is under 18 years of age.

Loan requirements

Loans must fulfil the following requirements:

• the loan must be in the name of the trust or company,
• an actual lending of money or an asset of particular value to a trust or company must have occurred, and
• there must be a clear intention by the trust or company to repay.

Treatment of a non-recognised loan and debt

A loan [2] that is not recognised as a liability of an entity will still be considered to be a personal financial asset [2] of the person making the loan and is subject to the deeming provisions [2].

Last amended: 8 September 2011

Recognised liability – loan and debt

Loans to or debts owed by an entity [2] 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.     More ? [12]

Documentation substantiating liabilities may be required where the person is attributed with less than 100% control [2] 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 [2] 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 [2](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 [2] of the sole attributable stakeholder [2] 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

Unsecured loans or loans secured by a 'floating charge' over all entity [2] 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 [2] 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

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.

Apportioning a loan or encumbrance

If there is a recognised liability secured against more than one asset of an entity [2], the value of the liability is shared between the assets in proportion to the respective values of the assets. The liability reduces the value of the assessable asset(s) proportionally, according to the value of the asset(s). Generally a liability will be secured against an asset such as real estate.    

Example of apportioning a loan or encumbrance

The total assets of an entity are $500,000. The sole attributable stakeholder's principal home [2], worth $100,000, is part of the entity assets. The entity has a recognised liability of $200,000 secured against all its assets. The net asset attribution amount for the attributable stakeholder [2] is calculated as follows:

Apportionment and multiple attributable stakeholders

If there are multiple attributable stakeholders, any genuine liabilities secured against the assets of the entity must be apportioned before determining each stakeholder's net asset attribution amount. If the principal home of a stakeholder is part of the entity assets then the home is an exempt asset [2] for that stakeholder only.    

Example 1 of apportionment and multiple attributable stakeholders

Example 1: Darren, Fiona (a partnered couple) and Terry are attributed with one third each of the assets of a private family trust. The trust has assets totalling $600,000, and includes the principal home of Darren and Fiona which is valued at $100,000. The trust has a liability of $300,000 secured against the assets. The net asset attribution amount for each stakeholder is calculated as follows:

Example 2 of apportionment and multiple attributable stakeholders

Example 2: Three brothers Tony, Dominic and Ben are attributed with one third each of an entity with assets totalling $1,000,000. The principal home of each brother is part of the assets of the entity. Tony's home is valued at $120,000, Dominic's home is valued at $90,000, and Ben's home is valued at $60,000. The entity also has a liability of $300,000 secured against all its assets. The net asset attribution amount for each stakeholder is calculated as follows: