Loans to members of companies limited by guarantee and the operation of Division 7A

A company limited by guarantee (the LBG company) is set up and becomes a beneficiary or an object of a trust (the Trust). 2. The Trust distributes net income to beneficiaries including the LBG company. The distribution to the LBG company may have franking credits attached. 3. The LBG company pays tax on the distributions at the company tax rate (30%). 4. The LBG company makes loans to directors, members or associates of the LBG company or related parties to the directors, members or associates (the borrower). 5. The borrower does not include the value of the loans in their assessable income in the year in which they are received. 6. The borrower pays minimal or no interest to the LBG in relation to these loans. 7. Aside from the perceived beneficial tax treatment, there is little or no commercial reason for the establishment of a limited by guarantee company.