Division 7A minimum yearly repayments: the deadlines and traps

A complying Division 7A loan must carry interest at or above the benchmark rate for each income year of the loan. The rate is the Reserve Bank's 'Housing loans; Banks; Variable; Standard; Owner-occupier' figure last published before the start of the income year, and the ATO publishes it each July.

The rate applying to an existing loan is the benchmark for the current year, not the year the loan was made. Locking in the rate at inception is one of the errors the ATO specifically names.

The minimum yearly repayment must be made on or before 30 June. This trips people up because the deadline for putting a loan on complying terms is a different date entirely (see below).

If the repayment falls short, the shortfall is treated as an unfranked deemed dividend in that income year. Paying the difference in July does not fix it — the dividend has already arisen. This is why a June review matters more than a September one.

To put a loan on complying terms under section 109N, the written agreement must be executed before the private company's lodgment day for the year the amount was paid. Lodgment day is the earlier of the due date for lodging the company's return, or the date the return is actually lodged.

That word 'earlier' is the trap. A firm that lodges a company return in September has closed its own window months before the statutory due date. If the loan documentation is not signed by then, it cannot be retrofitted.

There is no prescribed form for the agreement. What is required is that it is in writing, carries interest at or above the benchmark rate for each year, and falls within the maximum term — seven years unsecured, or 25 years where secured by a registered mortgage over real property.

Repayments do not have to be made in cash. A set-off is valid — but the ATO's position is that it must be agreed and documented by both the borrower and the company by the end of the income year.

A journal entry on its own is not sufficient. Nor is a dividend resolution, even one stating that the dividend is credited to the shareholder's loan account. A resolution is a unilateral act by the company; it is not an agreement between two parties. This is one of the errors the ATO lists on its 'Division 7A myths debunked' page.

A Division 7A deemed dividend is assessable to the shareholder or associate as a dividend, it arises on the last day of the income year, and — critically — it is unfranked and cannot be franked. That is what makes it punitive: the amount is taxed at full marginal rates with no franking offset, even though it came out of company profits that have already borne tax.

The total is capped at the company's distributable surplus. Where that cap applies, the company must give a written statement to each affected shareholder or associate setting out the distributable surplus and the total dividends that would otherwise have applied. That written-statement obligation is widely missed.

Section 109RB allows the Commissioner to disregard a deemed dividend, or allow it to be franked. It is not automatic — you have to apply, and the ATO applies a two-step test.

First, a threshold question of fact: was the breach the result of an honest mistake or inadvertent omission? The taxpayer bears the onus of showing that is more probable than not. Only if that is satisfied does the Commissioner go on to consider whether to exercise the discretion at all. The ATO's practice guidance is PS LA 2011/29, and practitioners have been publicly warned that section 109RB requests are being scrutinised.

Division 7A remains a named focus area for privately owned and wealthy groups in the ATO's most recently published areas of focus, covering the 2025-26 year. The specific items called out:

Two points from the ATO's myths material are worth repeating to clients directly. First, a company's money is not the owner's money — a company is a separate legal entity even where the client is the sole director and sole shareholder. Second, Division 7A reaches associates: spouses, children, other relatives, and related trusts and companies. A loan to a client's spouse can trigger it.

This article is general information for registered practitioners. Verify the current-year rate and the client's specific facts before advising.