Division 7A Loans and Minimum Repayments

For clients with a current Division 7A obligation, where there has previously been a loan, payment or debt forgiveness of a loan to a shareholder, or associate of a shareholder, by a private company, you will be aware of the minimum annual principal and interest repayment required as part of your complying loan agreement obligations.

Where a Division 7A loan is made by a private company or trust, a complying loan agreement must be completed before the lodgement, or due date for lodgement (whichever the earlier), of the income tax return for the year in which the loan was made.

There are three elements to a complying Division 7A loan agreement:

1.      it must be in writing;

2.      it identifies the interest rate to be the applicable Division 7A interest rate for the year;

3.      it identifies the term of the loan (unsecured loans are a maximum of 7 years and secured loans – by mortgage over real property - a maximum of 25 years).

Note, loans from discretionary and/or unit trusts may also require minimum repayments under Division 7A complying loan agreements.

For many of our clients, the complying loan agreements are currently over a seven year time period, as this type of loan does not require security over real property to be provided (required for loans over longer than 7 years).

Prior to the 2024 financial year, the benchmark interest rates for these loans have been historically very low, with the applicable rates for each since 2019 being:

            2019                5.20%

            2020                5.37%

            2021                4.52%

            2022                4.52%

            2023                4.77%

2024                8.27%

2025                8.77%

2026                8.37%

2023/24 saw the increase in the benchmark interest rate from 4.77% to 8.27%, which resulted in a significant increase in the repayment for each Division 7A loan for that year, compared to previous years.

What does this mean in real dollars?

In the following example, if you had borrowed $100,000 from your related company during the 2019/20 financial year, while the repayment obligation in 2023 was $17,531, the repayment required in 2024/25 had increased to $19,005:

You can also see the difference in the interest paid each year, even on the reducing balance.

Some clients have a number of different loans that commenced in successive years, where separate repayments are required in relation to each of the loans. The increased repayment obligation from the 2023/24 financial year may require a review of the strategy as to how the minimum repayments are made to the company or trust during the current year.

While some clients prefer to make direct cash injections to meet their repayment obligations, others may wait for the payment of a dividend from the company before making the required minimum repayment. The repayment strategy can change from one year to the next, but it is essential that the minimum repayment is made.

Strategies that don’t comply with the minimum loan repayment obligation include where a new loan in the current year is created to make the minimum loan repayments in previous years, or where a client deposits funds to make the minimum loan repayment, but then soon after withdraws those funds and creates a new loan via the withdrawal.

Just a reminder, the minimum loan repayment is due by the income tax return lodgement date for the company or trust (actual lodgement date if earlier than the last due date for lodgment, which may be as late as 15 May in the year following the loan).

Where the minimum loan repayment is not made by the due date for lodgement (or earlier, where the return is lodged prior to this date), the balance of the loan is treated as an unfranked dividend in the hands of the person who received the loan from the company or trust and subject to income tax at their marginal tax rate.

Apart from the income tax implications, as a result of the unpaid balance of the loan being included in taxable income, this extra ‘income’ may also trigger other taxation provisions, such as the repayment of any private health insurance rebate aceessed (for the individual and their spouse), impacts to the taxation payable on superannuation contributions and adjustments to other transfer payments, such as child care subsidy.

Where to from here?

Ideally, where funds are borrowed from a related private company or trust during the year, it may be that this loan can be repaid prior to 30 June of that year, rather than having a loan at the end of the financial year (or repaid after this date, but prior to the company or trust’s income tax return being lodged for that year).

Some repayment strategies may include the payment of a dividend to shareholders (sufficient to repay the loan or at least make the minimum annual repayment), or where employee associates are due bonus payments, that the net amount of the bonus may be applied to outstanding loan amounts. Depositing cash to the company or trust is the simplest strategy to reduce the loan obligation, subject to the comments above.

Rather than ‘kicking the can down the road’, if you are able to repay amounts in the year of, or prior to the date the company or trust return is lodged for the year that the loan, payments or debt forgiveness occurred, it results in a less expensive outcome, as there is no additional cost associated with acquiring a complying loan agreement, no future interest repayment required and an overall reduction in your accounting fees, as there is one less item for your accountant to ensure that you are in compliance with.

Sounds like a better outcome for all concerned!

Michelle Wilson

Updated 7 March 2026