A Division 7A loan agreement is a written agreement that puts a loan from your private company to you or an associate on complying terms, so it is not treated as a dividend. Under section 109N it must be in writing, charge at least the ATO benchmark rate, and run no more than 7 years unsecured or 25 years if secured by a registered mortgage.

If your accountant has told you that you need one, they are almost certainly right, and the clock is already running. The part that catches business owners out is not the paperwork. It is the deadline. Get it wrong by a day and there is no retrospective fix, only an application to the Commissioner and a hope.

I am Mina Baselyous, a CPA, Chartered Tax Advisor and Registered Tax Agent in Melbourne. Division 7A is the single most common area where we see otherwise well run businesses carrying a live tax problem they do not know about. This article sets out exactly what a complying agreement has to contain, when it has to exist, what the rate is for the current year, and what your options are if you have already missed it.

What a Division 7A Loan Agreement Actually Does

A Division 7A loan agreement converts what the tax law would otherwise treat as a disguised dividend into a genuine, commercially documented loan. Without it, money you draw from your company is deemed to be an unfranked dividend in your hands. With a complying agreement in place by the deadline, it is simply a loan you repay over time with interest.

The logic is straightforward once you see it. Your company pays tax at the company rate. You pay tax at your marginal rate. If you could simply take company profits home as a loan that nobody ever repays, you would have converted company tax into no tax at all. Division 7A of the Income Tax Assessment Act 1936 exists to stop that.

This applies to money actually drawn out of the company. In our experience the most common triggers are not deliberate schemes at all. They are a director paying a personal expense on the company card, a loan to fund a deposit, or a shareholder loan account that quietly drifted into debit across a busy year and nobody looked at it until the accounts were prepared. For the full background on how the rules fit together, see our guide to Division 7A for Australian business owners.

The Deadline: Lodgment Day, and Why There Is No Retrospective Fix

The agreement must be in place before your company’s lodgment day for the year the loan was made. The ATO defines lodgment day as the earlier of the due date for lodging the company’s income tax return, or the date the return is actually lodged. Miss it and the loan is a deemed dividend for that year. You cannot sign a document in a later year and backdate the problem away.

Read that definition carefully, because the word “earlier” does a lot of work. If your company’s return is due on 15 May but your accountant lodges it on 3 March, your deadline was 3 March. Lodging early shortens your own window. We have seen agreements prepared in good faith in April for a return that was lodged in February, and the document was worthless for that year.

The ATO’s own guidance on loans by private companies, last updated 2 July 2026, states it plainly: a loan is deemed to be a dividend if it is “not fully repaid before the private company’s lodgment day for the year when the loan is made”, and a private company’s lodgment day “is the earlier of the due date for lodgment, or the actual date of lodgment of their income tax return for the income year”.

You do have one alternative to signing an agreement: repay the loan in full before lodgment day. That is a real option and sometimes the cleaner one. Be careful, though, because repaying the loan and then immediately reborrowing a similar or larger amount is specifically disregarded, so the repayment does not count. More on how the repayment rules work in practice is in our article on Division 7A loan repayments.

The Three Tests Your Agreement Has to Pass

Section 109N sets three requirements, and all three must be satisfied before lodgment day. The agreement must be in writing. The interest rate for years after the year the loan is made must equal or exceed the benchmark rate. And the term must not exceed the statutory maximum for that kind of loan. Fail any one and the whole loan is caught.

1. In writing

There is no prescribed ATO form. A verbal understanding, a board minute noting an intention, or a line in the accounts is not an agreement. It has to be a document that exists, signed and dated, before lodgment day.

2. Interest at or above the benchmark rate

The rate must be at least the Division 7A benchmark interest rate. You may charge more. You may not charge less, and you certainly may not make the loan interest free. Note the timing quirk: no interest is payable in respect of the year the loan is made. Interest starts from the following income year.

3. A maximum term of 7 or 25 years

An unsecured loan runs a maximum of 7 years. A 25 year term is available, but only on strict conditions that a lot of commentary skips. The whole of the loan, all 100% of it, must be secured by a mortgage over real property that is actually registered under state or territory law. And when the loan is first made, the market value of that property, less any liabilities secured over it in priority, must be at least 110% of the loan amount.

That 110% buffer is where most 25 year loans fall over. A property with an existing bank mortgage rarely leaves enough unencumbered equity to clear the test. In practice, for the great majority of owners we work with, the answer is a 7 year unsecured loan and a repayment plan that is actually affordable.

The Division 7A Benchmark Interest Rate for 2026-27

The Division 7A benchmark interest rate is 8.77% for the income year ending 30 June 2027, and was 8.37% for the year ended 30 June 2026. These are published by the ATO and set from the Reserve Bank’s standard owner occupier variable housing loan rate last published before the income year starts.

Both figures are from the ATO’s Division 7A benchmark interest rate page, last updated 1 July 2026. The rate for the year ended 30 June 2025 was also 8.77%.

Here is the point people get wrong. The benchmark rate is not fixed at the rate applying when the loan was made and then locked in for the life of the loan. The minimum rate is reset every year to that year’s benchmark, and your minimum yearly repayment is recalculated using the current year’s rate. What is fixed at the year the loan was made is the maximum term, and therefore the repayment schedule you are locked into. If you want to model the numbers, use our Division 7A loan calculator.

Minimum Yearly Repayments: Where It Goes Wrong in Year Two

Signing the agreement is only the start. From the year after the loan is made, you must make a minimum yearly repayment of principal and interest by 30 June each year. Fall short and the shortfall itself becomes a deemed dividend for that year, even though your agreement was perfectly compliant when you signed it.

The minimum yearly repayment is an amortisation calculation. It takes the loan balance not repaid at the end of the previous year, applies the current year’s benchmark rate, and spreads the result over the remaining term. Because the benchmark rate moves, the required repayment moves with it. A repayment amount that was right last year may be short this year.

The more expensive mistake is how the repayment is made. A repayment has to be a real payment. The ATO’s guidance is explicit that a backdated journal entry recording a payment on a date when no payment was actually made will not be accepted, and it works through an example where a family group moved $150,000 between related entities entirely by journal and the minimum yearly repayment was still treated as unmade.

There is an important nuance here that is worth getting right, because a lot of published commentary flattens it. A legally effective offset does count. If the company declares a dividend payable to you, and before 30 June you and the company enter into an agreement to offset that liability against your loan obligation, the ATO accepts the minimum yearly repayment as made. What does not work is a book entry with no underlying mutual liability and no agreement behind it. The distinction is whether a real legal obligation was genuinely discharged.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the failure we see most is not the first year. It is year three or four, when the business is tight on cash, the repayment is treated as a bookkeeping formality, and nobody notices the shortfall until the following March.

What Happens If There Is No Complying Agreement

The unrepaid loan is treated as an unfranked dividend paid to you at the end of that income year. It goes into your assessable income and is taxed at your marginal rate, up to 47% including the Medicare levy for 2026-27. Because it is unfranked, you get no credit for the tax the company already paid on those profits. That is the sting.

The 47% figure is the top marginal rate of 45% on taxable income above $190,000 plus the 2% Medicare levy, per the ATO’s resident tax rates for 2026-27, last updated 13 August 2026. Set that against company tax already paid on the same profits and you are looking at effective double taxation of the same dollar.

Two things soften the blow. The total deemed dividend is capped at the company’s distributable surplus for the year, which is why the distributable surplus calculation matters so much. And the Commissioner has a discretion, covered next. Neither is a plan. They are damage control.

Section 109RB: The Relief Most Pages Do Not Mention

Section 109RB gives the Commissioner a discretion to disregard a deemed dividend, or to allow the company to frank it, where the breach arose from an honest mistake or an inadvertent omission. It is a genuine second chance, and it is the reason a missed deadline is serious but not always fatal. It is not automatic and it is not a substitute for getting it right.

The ATO applies a two step test. Step one asks whether the breach really did result from an honest mistake or inadvertent omission. Only if the answer is yes does step two follow, where the Commissioner weighs the statutory factors: the circumstances that led to the mistake, how much corrective action was taken and how quickly, whether Division 7A has bitten these entities before, and anything else considered relevant.

Corrective action is the lever you actually control. The ATO describes it as putting the parties back in the position they would have been in had Division 7A not been breached: executing a complying section 109N agreement, and making catch up repayments of principal and interest as if the loan had always complied, with interest compounded to reflect the years of non payment. In the ATO’s own worked example a $700,000 loan left undocumented from 2013 required a catch up payment of $541,708.

The ATO’s guidance on the section 109RB discretion, last updated 14 October 2024, includes six worked examples. The pattern across them is clear. Taxpayers who found the problem themselves, disclosed it promptly and fixed it succeed. The one example that fails involves a company that never documented the loan, never recorded it in its books, and funded it from undisclosed income. That is not an honest mistake, and the discretion does not reach it.

There is a separate discretion for a shortfall in a minimum yearly repayment caused by circumstances beyond your control where you would suffer undue hardship. Different test, different section, and it is worth knowing which one applies to your facts before you write to the ATO.

What Your Division 7A Loan Agreement Must Contain

There is no prescribed ATO form, but the ATO sets out a minimum. The agreement must identify the parties, set out the essential terms of the loan, and be signed and dated by the parties. In our experience a document that covers the following list, and is signed before lodgment day, holds up.

• The full legal names of the lender company and the borrower, including ACNs and, where the borrower is a trust, the trustee in its capacity as trustee.
• The amount of the loan, or the mechanism for loans made across the year.
• The date the loan was made, which drives the deadline and the maximum term.
• The term, being 7 years unsecured or 25 years if the registered mortgage and 110% value tests are both met.
• The interest rate, expressed so it is always at least the benchmark rate for each income year rather than a fixed number that could fall below it.
• An express requirement to repay, with the minimum yearly repayment obligation and a 30 June payment date.
• Security details if the 25 year term is being used, including the registered mortgage particulars.
• Signatures and dates from all parties, dated before lodgment day.

One practical tip. A written agreement can be drafted to cover loans made to the same shareholder or associate across several future income years. That is usually a better arrangement than scrambling to paper a new document every year, and it removes the single most common cause of failure, which is simply forgetting.

Loans to Associates: The Part Owners Consistently Miss

Division 7A does not only catch loans to shareholders. It catches loans to associates of shareholders, which includes spouses, children, other relatives, related trusts, partnerships and other companies in the group. A loan from your company to your family trust is squarely within the rules even though the trust never owned a share.

This is the most common blind spot we see in established groups. The company lends working capital to the family trust that runs the operating business. The company pays out a loan the trust had with its bank as part of a debt consolidation. The company covers a private expense for the owner’s adult child. None of these feel like a dividend to the owner, and all of them can be one.

The reach is wider still. Division 7A also picks up loans routed through interposed entities, and payments where the shareholder or associate has an obligation to repay. The test the ATO applies is whether a reasonable person would conclude the loan was made because the borrower was a shareholder or an associate of one. Our article on the top five Division 7A loan traps covers the patterns we see most often, and how to avoid a deemed dividend sets out the strategies that work.

This Is Not the Same Question as an Unpaid Present Entitlement

Everything above concerns money actually drawn out of a private company. A bare unpaid present entitlement owed by a trust to a corporate beneficiary is a different question, and the answer changed in 2026. Do not apply this article’s rules to a UPE, and do not assume an old position still holds.

In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court held that a UPE owed by a trust to a corporate beneficiary is not a Division 7A loan where the company simply does nothing about it. The Commissioner lost. The judgment and the full case record sit on the High Court’s file for matter M47/2025.

The published guidance has not fully caught up, and the distinction matters if you are relying on a ruling. In its Decision Impact Statement, published 26 June 2026, the ATO said it will withdraw Taxation Determination TD 2022/11. As at 30 September 2026 that withdrawal has not happened. TD 2022/11 is still listed on the ATO Legal Database under its original number, and its status line records only that the ruling is being reviewed as a result of a recent court decision. No withdrawal notice has issued. Check its current status on the Legal Database before you rely on it in either direction.

Three things did not change, and they matter. A UPE that has already been converted into a complying section 109N loan remains a loan and must keep being serviced. Subdivision EA still applies where the trust pays or lends to a shareholder of the corporate beneficiary while the UPE is outstanding. And section 100A still applies to reimbursement agreements. We have written this up in full in our article on bucket companies. Nothing in Bendel touches money you have actually taken out of a trading company. That is still a straight Division 7A loan and it still needs an agreement.

How to Get This Right Before Your Next Lodgment Day

The work is straightforward if you start early. Identify every loan and payment to shareholders and associates for the year, confirm the company’s lodgment day, decide for each loan whether to repay it or document it, execute the agreement before that date, and diarise the first minimum yearly repayment for the following 30 June.

Where this becomes advisory work rather than compliance is the decision underneath the paperwork. A 7 year loan at 8.77% on a meaningful balance is a real cash commitment out of after tax money, every year, for seven years. Often the better answer is a combination: a dividend or bonus to clear part of the balance, a bucket company to hold future profits at the company rate, and a complying loan for the remainder. That is a structuring conversation, not a document.

If you are reading this because your accountant has told you that you need a Division 7A loan agreement, the useful next question is not “where do I get the template”. It is “how did the balance get there, and what stops it happening again next year”. That is the conversation we have with clients as part of our tax planning work.

Frequently Asked Questions

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