If you’re running a private company and have extended funds or benefits to shareholders or their associates, Division 7A should be firmly on your radar this financial year. The ATO continues to treat it as a key compliance priority, and with the benchmark interest rate now at 8.77%, the risk of unintended tax consequences has increased.
Division 7A is designed to prevent companies from distributing profits to shareholders tax-free through informal loans, payments, or forgiven debts. While many directors are familiar with the concept, the issues often arise in the finer details — repayment timing, proper documentation, and how these transactions are structured within a group.
Key Areas to Watch in FY2025–26
- Higher Interest Rates, Higher Minimum Repayments
The updated Division 7A benchmark interest rate of 8.77% means that minimum annual repayments will be higher than in recent years. Companies must ensure their repayment schedules are reviewed and updated, or risk triggering a deemed dividend. - Review Legacy Loan Arrangements
Older loans made under previous rules or informal agreements may no longer meet compliance standards. These should be revisited and either formalised or repaid, especially before the company’s lodgment day. - Avoid Circular Repayments
The ATO has signalled a continued focus on arrangements where repayments are made only to be re-borrowed soon after, particularly between related entities. Under section 109R, such repayments may be disregarded, increasing the risk of a Division 7A breach. All repayments should be genuine and retained. - Trust Distributions and UPEs Still Pose a Risk
Unpaid present entitlements (UPEs) involving private company beneficiaries remain a complex area. While not all UPEs are automatically treated as Division 7A loans, they may be caught under Division 7A if the funds are accessed or used like a loan. The ATO continues to scrutinise these arrangements, making clear documentation and proactive structuring essential, especially when trusts are involved. - Timely Documentation Is Still Critical
Many Division 7A issues arise simply due to poor or delayed recordkeeping. Loan agreements must be in writing, dated, and signed before the due date of the company’s tax return. Interest and repayments should be tracked accurately and documented in real time. - Use Division 7A Strategically
With the right structure, Division 7A loans can support broader group funding strategies or shareholder investment while maintaining tax efficiency. Proactive planning and compliance can turn this obligation into a strategic tool rather than a tax liability.
As FY2025–26 unfolds, shareholder loans should not be left unchecked. With increased interest rates, tightened ATO guidance, and complex inter-entity relationships, the risks are real — but so are the opportunities to plan smarter.
