Offering a loan sounds like a quick and effective way to make some extra money on the side. However, whether you can just simply write up a contract for a private loan and move on is a bit more difficult. How to loan money and whether you can depends on what type of business structure you are. If you are a private company then you will have to face the Tax Act. If you’re acting as a sole trader or a partnership then you are entering the grounds of a credit provider unless you are providing private loans.
Type of Business
The first consideration is what type of business you are. This means taking into account what industry your business fits in. Then after working out your industry, the next consideration is for what purpose, and why you are deciding to loan money.
Tax Act & loan money
The law governing businesses loaning money is the Income Tax Assessment Act 1936 (Cth) div 7A. The law covers private companies providing either money or benefits to a shareholder or associate. As a result this includes loans. Generally, if a private company provides a loan then for tax purposes they have provided a dividend. The act also sets out minimum yearly repayments, timing and minimum interest rates. You can use the calculator tool to assist with this. If you are still unsure about how to navigate lending money and tax obligations you could always check with a tax lawyer.
Sample Industries Pty Ltd loans $15,000 to one its shareholders Lucy. The money is provided by way of a promissory note. This means Div 7A may apply to the loan.
Sample Industries Pty Ltd loans $15,000 to one another company, Stock Industries Pty Ltd . The money is provided by way of a promissory note. As the loan was provided to another company, this means the act would not consider the loan to be a dividend. This is just a brief sample as there are numerous exceptions.
Credit provider and private loans
A credit provider is just someone who provides credit. Therefore, a credit provider must follow the responsible lending guidelines set out in the National Consumer Credit Protection Act 2009 (Cth). However, as an individual you would be providing a private loan. One of the ways to recognise a private loan is the bargaining power between the parties. When there is a private loan, generally the individuals can tweak and change the terms to suit each other. Despite it only being a private loan, you should still have a contract in case things break down.
Nevertheless, it all comes down to a couple of factors. The first is what type of business structure you are operating as. This leads to the next consideration of whether you are lending money as an individual. Therefore, you could loan money under the category of a private loan. The important thing to keep in mind is that you abide by the taxation requirements and that you aren’t acting as an unauthorised credit provider.
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