The Australian Taxation Office (ATO) has updated the rules for Division 7A (Div-7A), an important part of taxation law for private companies. These changes affect how loans, payments, or forgiven debts between private companies and their shareholders or associates are treated for tax purposes.
Understanding these updates is essential for companies, trusts, and business owners to ensure compliance and optimise tax outcomes.
What is Division 7A?
Division 7A of the Income Tax Assessment Act 1936 is an anti-avoidance measure designed to prevent private companies from distributing profits tax-free to shareholders or their associates.
Under Div-7A:
- A private company can be deemed to have paid an unfranked dividend if it makes a loan or provides financial accommodation to a shareholder or associate.
- The amount of the deemed dividend is generally equal to the outstanding loan balance at the company’s tax lodgement day.
- This applies to loans, UPEs (Unpaid Present Entitlements), or forgiven debts.
Previously, private companies could manage Div-7A loans using:
- Sub-trust arrangements – interest-only repayments for 10 years, followed by full principal repayment.
- Complying loan agreements – principal-and-interest repayments over 7 years.
What Has Changed?
From 1 July 2022, the ATO has removed the ability to use sub-trust arrangements for Div-7A loans.
Key changes for all new Div-7A loans include:
- Maximum loan term: 7 years
- Benchmark interest rate: Must use the ATO’s published benchmark rate (based on bank variable housing loan rates)
- Repayment requirement: Both principal and interest must be repaid each year
The ATO’s position is that sub-trust arrangements create an immediate Div-7A loan, even if the funds are not used by the shareholder or associate. As a result, sub-trust arrangements are no longer permitted.
Why This Matters for Businesses
The removal of sub-trust arrangements simplifies Div-7A compliance. Companies can now only use:
- Complying loan agreements, or
- Corporate investment and trading structures
Previously, taxpayers could use sub-trust arrangements combined with complying loans to defer tax for up to 17 years. This option ceased after 30 June 2022, so any planning strategy relying on sub-trusts must now be reconsidered.
The Silver Lining
Although sub-trusts are no longer available, this change:
- Reduces complexity in managing Div-7A loans
- Encourages more transparent and compliant loan structures
- Leaves companies with clear, practical options for managing UPEs and shareholder loans
What You Should Do
If you have existing or potential Div-7A loans, it’s important to review your arrangements. The actions required may vary depending on your:
- Tax lodgement dates
- Existing UPEs or loan structures
We encourage clients to contact a New Leaf Advisory advisor to review your Div-7A situation and determine if any action is required to remain compliant.