Div 7a Loans and Deceased Estate

Late in 2020 we were engaged by new clients, a family of three siblings whose mother had recently passed away, to perform their accounting and taxation work.

Their Father had passed away a few years earlier and consequently they inherited various property investment companies. A number of these Companies had Division 7A loans owing, amounting to a substantial sum. Their previous Melbourne Accountant was not forthcoming in providing us with Div 7A Loan principal and interest repayment Schedules, and therefore we have had to reconstruct these various balances.  In doing so we find the deceased mother’s Div 7A Loan still exists on the Balance Sheet as at 30^th June 2020.

Our question to you is how do we treat Div 7A Loans relating to the deceased? Are these loans simply forgiven or do they just sit on the balance sheet? If not, are they taken over by their siblings who have to meet ongoing principal and interest repayments?

Answer

I would be getting them off the balance sheet.

The ideal situation would be that the Estate repays the loan.

If they are unable or unwilling to do so, then I would not forgive the loan but write it off as a bad debt being a capital loss.

It is on capital account because clearly the company was not in the business of money lending.

The journal would be:

Dr          Capital Loss (Share capital accounts)                XXXX

       Cr    Loan                                                                                          XXXX

We do not believe the deceased estate can be burdened with deemed dividends because:

• The entity to whom the private company is taken to have paid the dividend must be the same entity to whom the private company made the amalgamated loan.

Therefore, for subsection 109E(1) to apply, the private company must have made the loan to the executor of the deceased estate.

Accordingly, as the private company made the loan to the shareholder, the executor of the shareholder’s deceased estate is not treated as having received a deemed dividend in respect of the amalgamated loan.

This interpretation is contained in ATO I.D. 2002/741.