Division 7A Loans and Minimum Repayments for 2023/24

For clients with a current Division 7A loan, 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.

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 timeframe, as this time period does not require security over real property to be provided for the loan.

Over the past few years, the benchmark interest rates for these loans have been historically very low, with the applicable rates for each of the past 5 years being:

              2019                   5.20%

              2020                   5.37%

              2021                   4.52%

              2022                   4.52%

              2023                   4.77%

2023/24 sees the increase in benchmark interest rate to 8.27%, which will result in an increased overall repayment for each Division 7A loan, 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 2023/24 has increased to $18,950, and only $27 of this increase relates to additional principal repayments.

Clients may 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 for 2023/24 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 – whatever strategy has been used previously may need to be revisited.

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 of the company or trust (in the above example, this was 15 May). 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. A less than ideal outcome.

Where to from here?

Ideally, where funds are borrowed from a related private company or trust during the year, it may be that the loan can be repaid, 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) and having to commence the Division 7A complying loan agreement and repayment process.

Some repayment strategies may include the payment of a dividend to shareholders (sufficient to repay the loan), or where employee associates are due bonus payments or reimbursements, that these 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 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

12 September 2023