FIRSTMATE BLOG: CAPTAINS LOG

Overdrawn Current Accounts30.04.2014

Question
Company A has made a loan to a related family trust.

Is Company A obliged to charge interest to a Trust, where that trust has an overdrawn current account?

Answer
Yes, Company A should charge interest on the advance provided to the family trust. If no interest is charged there is a risk the advance will be a deemed dividend.

A deemed dividend will arise where there is a transfer of value and the transfer is caused by a shareholding relationship (i.e. the recipient (the trust) is associated with the shareholder) [ss CD 4, 6(1)(a)(ii), Income Tax Act 2007]. The deemed dividend would be equal to the difference between the interest charged (if any) and the interest calculated at the prescribed FBT rate.

To avoid a deemed dividend arising, Company A would need to charge interest at a market interest rate.

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