ATO reviews of Division 7A loans

Division 7A is a set of rules in the Income Tax Assessment Act 1936 (ITAA 1936) that treats payments, loans and forgiven debts from a private company to its shareholders, or their associates, as dividends. A Division 7A deemed dividend is generally unfranked and taxed in the recipient's hands, unless an exclusion applies, such as a complying loan agreement put in place before the company's lodgment day.

What does Division 7A do?

Under Division 7A of Part III of the ITAA 1936, a private company is taken to pay a dividend at the end of its income year if, during that year, it:

• pays an amount to a shareholder or a shareholder's associate (s 109C), which can include paying their private expenses or letting them use a company asset, such as a holiday house (s 109CA),
• lends money to them, or gives them other credit or financial accommodation (s 109D(3)), and the loan is not fully repaid before the company's lodgment day (s 109D(1)), or
• forgives a debt they owe the company (s 109F).

The lodgment day is the earlier of the due date for the company's tax return and the date it is actually lodged (s 109D(6)), so lodging early brings the deadline forward. "Associate" is defined widely and can include relatives, related trusts and other entities (ITAA 1936 s 318). Payments and loans made through an interposed entity can also be caught (Subdivision E, s 109T).

The deemed dividend is assessable to the recipient (s 109B, s 44) and generally can't be franked (Income Tax Assessment Act 1997 (ITAA 1997) s 202-45(g)(i)). The total deemed dividends for a year are capped at the company's distributable surplus, broadly its net assets less paid-up share capital, with some adjustments (s 109Y).

For example, suppose a company lends $100,000 to a director who is also a shareholder, and by the lodgment day nothing has been repaid and there is no written agreement. The $100,000 is generally an unfranked dividend for that year, even though the director still owes the money. Special rules aim to stop it being taxed twice if a later dividend is set off against the loan (s 109ZC).

What is excluded?

Exclusion	Section
The loan is fully repaid before the lodgment day	s 109D(1)(b)
A complying written loan agreement is in place before the lodgment day	s 109N
The payment discharges a debt the company owes the recipient, up to an arm's length amount	s 109J
The payment or loan is to another company (not acting as trustee)	s 109K
The amount is assessable to the recipient anyway, such as salary	s 109L
The loan is made in the ordinary course of the company's business on its usual arm's length terms	s 109M

What makes a Division 7A loan agreement compliant?

A loan is not treated as a dividend in the year it is made if, before the lodgment day for that year (s 109N(1)):

1. the agreement is in writing,
2. the interest rate for each later year is at least the benchmark interest rate for that year, generally the Reserve Bank's indicator lending rate for bank variable housing loans last published before the year starts (s 109N(2)), and
3. the term is no more than 7 years, or 25 years if the whole loan is secured by a registered mortgage over real property worth, after prior-ranking debts, at least 110% of the loan when first made (s 109N(3)).

In each later year, the borrower must pay at least the minimum yearly repayment under s 109E by the end of the company's income year (not the lodgment day), or the shortfall is generally treated as a dividend for that year (s 109E(1)). Broadly, the minimum yearly repayment is the yearly payment of principal and interest that would repay the loan balance at the end of the previous year over the loan's remaining term, at the current year's benchmark interest rate (s 109E(5)–(6)). For a company with a 30 June year end, the benchmark interest rate is 8.37% for 2025-26 and 8.77% for 2026-27 (ATO, Division 7A – benchmark interest rate).

Repayments must be genuine. A repayment is ignored if a reasonable person would conclude that the borrower intended, when making it, to borrow a similar or larger amount back, or borrowed from the company in order to make it (s 109R(2)). That rule does not apply to a repayment made by setting off a dividend or salary the company owes the borrower (s 109R(3)).

What does the ATO look for in a Division 7A review?

Division 7A is an integrity rule meant to prevent the tax-free distribution of company profits (PS LA 2011/29, part 12D). Loan accounts and private spending usually show in a company's accounts, so Division 7A often comes up in ATO audits and reviews of private groups, even ones that began on another issue. ATO officers are told to consider the discretion to disregard a deemed dividend when they become aware during a review or audit that Division 7A applies, not only when it is requested (PS LA 2011/29, part 3).

Common problems include:

1. No written agreement by the lodgment day for a director's loan account in debit at year end.
2. An agreement that doesn't comply, such as a below-benchmark rate, too long a term or poor execution.
3. Missed or short minimum yearly repayments, including calculation errors.
4. Repayments that aren't real, such as money borrowed back soon after, or journal entries with nothing behind them.
5. Private use of company money or assets, such as private expenses or family use of a company-owned property.
6. Payments through a related trust or company that end up with the shareholder.
7. Unpaid trust entitlements to a company while the trust lends to the individuals behind it.

See ATO audit red flags for what else draws attention.

Are unpaid present entitlements Division 7A loans after Bendel?

An unpaid present entitlement (UPE) arises when a trustee makes a company beneficiary entitled to trust income but doesn't pay it. The ATO's view in Taxation Determination TD 2022/11 was that a company that knows it can demand payment of its UPE, and doesn't, provides "financial accommodation" to the trust, making the UPE a loan under s 109D(3) (paras 6–9).

The Full Federal Court disagreed in Commissioner of Taxation v Bendel [2025] FCAFC 15, and on 10 June 2026 the High Court dismissed the Commissioner's appeal (Commissioner of Taxation v Bendel [2026] HCA 18). The majority held that, under that trust deed and those resolutions, the amounts set aside were held on separate trusts for the company and no debt arose. It rejected the argument that s 109D(3) covers a beneficiary simply not insisting on payment (at [6]). Two judges dissented.

The ATO's decision impact statement of 26 June 2026 says:

• if a company beneficiary has taken no relevant action on its UPE, the ATO won't treat it as a s 109D loan, whether or not it is held on a separate trust (para 33),
• UPEs already put on complying loan terms are loans and will still be treated that way, even if that step was taken on a mistaken view of the law (paras 34, 38), so the minimum yearly repayments on those loans still need to be made,
• Subdivision EA can still apply if the trust lends to, forgives a debt of or, in narrower cases, pays the company's shareholder or their associate (other than a company) while the UPE is unpaid (ss 109XA, 109XB; para 35), and section 100A may also apply (para 36), and
• anyone assessed on the basis that a UPE alone was a loan can seek an amendment if still in time, or object, and the ATO will consider extensions of time (paras 40–42).

The ATO also said it will withdraw TD 2022/11 (para 43), although it hadn't formally done so by early November 2026. It is also reviewing its section 100A ruling and guideline and other UPE guidance (para 44). For the trust side, see section 100A trust reviews.

Can the ATO disregard a Division 7A deemed dividend?

Yes, in some cases. If a deemed dividend arose because of an honest mistake or inadvertent omission by the recipient, the company or anyone else whose conduct contributed, the Commissioner may decide in writing to disregard it or allow it to be franked (s 109RB(1)–(2)). The Commissioner must consider how the mistake happened, what corrective action was taken and how quickly, and whether Division 7A has applied to those entities before (s 109RB(3)). Conditions can be attached, such as making specified payments within a set time (s 109RB(4)).

The ATO's approach is in PS LA 2011/29 (last updated 20 November 2025):

• The onus is on you to give enough evidence of an honest mistake or inadvertent omission (part 7). Contemporaneous documents generally carry more weight than later explanations (part 10B).
• Ignorance of the law isn't enough on its own, but reasonable reliance on professional advice is likely to support an honest mistake (parts 9A, 9D).
• Correct the position promptly. Corrective action usually means converting the amount to a complying s 109N loan from the time the dividend arose and making catch-up repayments with interest (part 12B, Appendix A). Delay may weigh against you.

For missed repayments caused by circumstances beyond the borrower's control, the Commissioner can also decide the shortfall is not a dividend where treating it as one would cause undue hardship (s 109Q), or disregard it if the borrower pays the shortfall within a specified time (s 109RD).

How should you respond to an ATO Division 7A review?

1. Pin down the scope. Confirm which entities, years and transactions are under review, and whether those years can still be amended: generally within 2 or 4 years after the notice of assessment, depending on the taxpayer, but at any time if the Commissioner is of the opinion there has been fraud or evasion (ITAA 1936 s 170(1)). See how far back the ATO can audit.
2. Gather the records. Loan ledgers, agreements, minutes, dividend declarations, bank records of repayments and lodgment dates, plus trust documents if relevant.
3. Test the ATO's analysis. Is the recipient a shareholder or associate? Is it a loan, a payment or neither? Does an exclusion apply? Does the distributable surplus limit the amount (s 109Y)? Is a UPE within the Bendel reasoning?
4. Correct what needs correcting. Where there was a genuine mistake, take corrective action and make a s 109RB request supported by evidence.
5. Deal with penalties. The base shortfall penalty is generally 25% of the shortfall for failing to take reasonable care, 50% for recklessness and 75% for intentional disregard (Taxation Administration Act 1953 (TAA) Sch 1 s 284-90). Telling the ATO before it notifies you of an examination generally cuts the base penalty by 80%, and disclosure afterwards can still earn 20% if it saves the ATO significant time or resources (Sch 1 s 284-225). See making a voluntary disclosure.
6. Answer the position paper. A clear written response is often the most practical chance to change the result. See responding to an ATO position paper.

Never backdate a loan agreement, minute or journal entry, or prepare one to look as if it existed before the lodgment day: documents signed now as corrective action should show the date they are actually signed. Making a false or misleading statement to the ATO can be an offence (TAA s 8K), and conduct aimed at getting around Division 7A can't be an honest mistake (PS LA 2011/29, part 9C).

Can you object to a Division 7A amended assessment?

Generally yes, under Part IVC of the TAA. The time runs from the notice of assessment, not from when you first hear about the review: for an amended assessment it is generally the later of 60 days after notice of the amendment and 2 or 4 years (depending on the taxpayer) after notice of the original assessment (s 14ZW(1B), (1BA)). A late objection can be lodged with a request for an extension of time (s 14ZW(2)).

If the ATO refused the s 109RB discretion, the objection can argue it was not properly exercised, and a s 109RB request can also be made for the first time on objection (PS LA 2011/29, parts 2 and 14). The objection decision can then go to the Administrative Review Tribunal or the Federal Court, generally within 60 days after notice of the decision (ss 14ZZ, 14ZZC, 14ZZN). See ATO objections.

How we help

• Review the position. With your accountant, we go through the loan accounts, agreements and trust records to identify which amounts are genuinely exposed.
• Deal with the ATO. We answer information requests and position papers, and prepare s 109RB, s 109Q and s 109RD requests with the evidence the ATO looks for.
• Challenge assessments. We prepare objections and run reviews and appeals.
• Work with accountants. We act for your clients and keep you involved (how we work with accountants).

Next step

Send us the ATO's letter or position paper, the company's financial statements and loan account ledgers for the years under review, any loan agreements, minutes and repayment records, and the dates the company's returns were lodged. If a trust is involved, include the trust deed and the distribution resolutions. In a first call we'll tell you which issues matter most and what to deal with first.