Division 7A Loan Agreement Rules for 2026–27

By Panbo Ye, CFP^®, FCPA, SMSF Specialist Advisor · Founder of Everglow · Updated 2 November 2026

Written for Business Owners

A private-company loan to a shareholder or associate may avoid deemed-dividend treatment under the complying-loan rules only if a written Division 7A loan agreement is in place before the company's lodgment day, charges at least the Australian Taxation Office (ATO) benchmark rate, stays within a 7-year or qualifying 25-year term, and is followed by minimum yearly repayments by 30 June when due. Before drafting, establish whether the balance is a loan, a trust borrowing or an unpaid trust entitlement.

Lisa is in her supermarket's back office in Hornsby, checking the accounts after paying a personal bill from the company bank account. The bookkeeper has called it a director's loan, so she assumes the paperwork is sorted. That accounting label is a starting point, not a tax solution.

When a Company Loan Needs a Written Agreement

A written agreement matters when a private company lends to a shareholder or associate and the group intends to leave that amount outstanding under complying loan terms. The first job, however, is identifying what happened, rather than reaching for a template.

Division 7A is a set of integrity rules in the Income Tax Assessment Act 1936 designed to address private-company benefits provided to shareholders and their associates. A deemed dividend is an amount tax law treats as a dividend even though the company hasn't formally declared one.

In this context, a private company generally means a company outside the tax-law definition of a public company. A shareholder owns shares, while an associate can include connected relatives, trusts or entities, depending on the statutory relationship tests. Being a director alone doesn't tell you everything you need to know.

Start with the transaction: A neat loan account doesn't establish who borrowed, when they borrowed or which tax rule applies.

Who this article is for: Private-company owners, family groups with a corporate beneficiary, and people lodging 2025–26 returns who need to distinguish historical drawings from new borrowing.

Currency note: This article reflects Australian rules and thresholds for the 2026–27 income year, current as at 10/2026. The Australian income year runs from July to June, so return preparation and current-year repayment planning may involve different loan years.

Check the records before choosing the document

For Lisa, the useful records are the company bank transaction, the personal expense invoice, the borrower's identity and the date the money left the company. Our guide to documentation standards provides a practical framework for keeping those records connected.

For broader owner-governance questions, Nanak Accountants and Associates' shareholder support for company owners is a complementary resource. Shareholder arrangements and Division 7A documentation address different questions, so one shouldn't be mistaken for the other.

Once the transaction is established, check writing, benchmark interest, maximum term and minimum yearly repayments. A director's loan description in the ledger doesn't do those jobs by itself.

What a Complying Division 7A Loan Agreement Must Contain

Get the label right before you draft anything. Money that left the company may be a direct loan to the shareholder, a borrowing by a related trust, or an unpaid present entitlement treated differently after the Bendel decision, and each path calls for a different document. A beautifully worded loan agreement wrapped around the wrong transaction is still the wrong transaction.

Once the transaction is confirmed as a company loan, a complying Division 7A loan agreement needs written terms identifying the parties, annual interest at least equal to the applicable benchmark, and a permitted loan term in place before the company's lodgment day. The ATO guidance on loans and other forms of credit sets out the ordinary 7-year maximum, the qualifying 25-year maximum and the secured loan's 110% property-value test.

Put the commercial terms in writing

Write the agreement with the actual lender and borrower named, because the ATO tests the legal parties first. A family name or a trading name that leaves the entities unclear can undo an otherwise careful document.

Record the advance, how the agreement covers it, the applicable interest mechanism, the term, and the repayment obligations. A clause referring to each year's benchmark handles annual rate changes more sensibly than a percentage copied into the document and later forgotten.

Keep the signed document with the transaction evidence and repayment schedule. The ledger should reconcile to those records rather than serve as a substitute for them.

Choose security for a reason

The longer statutory term requires a registered mortgage over property securing the entire loan. A personal guarantee, a general promise to offer security or other assets does not satisfy the registered-mortgage requirement for the 25-year term.

The property test applies when the loan is made. A later increase in value doesn't establish that the required equity existed at the outset, and a later valuation only helps if it reliably addresses the relevant earlier value.

This creates a genuine trade-off: a longer repayment period may ease annual cash demands, but the borrower must accept property security and the associated legal work. Choosing a longer term because the annual instalment looks friendlier can overlook the obligations attached to the mortgage. My preference is to settle the security question as a commercial decision before anyone prices the tax outcome.

Security should support a deliberate borrowing decision, not rescue an agreement chosen before anyone checked the property.

Our discussion of related-party transactions helps frame the difference between family intentions and properly recorded entity obligations. The company must also account for interest received as assessable income and report relevant Division 7A information in its return.

A signed agreement fixes the terms on paper. Each repayment still has to reach the company on time, year after year, for the agreement to keep doing its job.

How Is the Division 7A Benchmark Rate Set and What Repayment Is Due?

The benchmark follows the Reserve Bank of Australia's indicator lending rate for standard variable owner-occupier housing loans published before the relevant income year begins. The ATO's Division 7A benchmark interest rate guidance provides the annual reference, rather than leaving the minimum rate to a family agreement.

For 2026–27, use the ATO's published benchmark rather than an older percentage copied from an existing spreadsheet. No benchmark percentage is quoted here because an unchecked rate is less useful than a clear instruction to use the official annual figure.

Work out the repayment, not just the interest

A minimum yearly repayment generally includes both principal and interest. Under the ATO's detailed Division 7A loan guidance, the calculation uses the previous year-end unpaid balance, the current benchmark and the remaining term, with the required repayment due by 30 June of the relevant income year.

1. Establish the opening balance. Take the amount still unpaid at the end of the previous income year and reconcile it to the loan records.
2. Apply the current benchmark. Use the rate for the repayment year, not automatically the rate applying when the advance occurred.
3. Use the remaining term. Calculate the amortising payment, meaning a payment that reduces principal as well as covering interest.
4. Check amalgamation. Combine loans made to the same shareholder or associate in the same income year for the same term or period into the relevant amalgamated loan.
5. Make and evidence the repayment. Complete the required payment before year-end. A journal that merely relabels an unpaid balance isn't evidence that a repayment occurred.

Charging interest and paying the minimum repayment are different actions. The company can record interest correctly while the borrower still falls short of the required payment.

Likewise, paying an amount that feels reasonable isn't the same as satisfying the calculation. The repayment needs to match the applicable balance, rate and remaining term.

Keep the documentation deadline separate

The company's lodgment day is generally the earlier of its return due date and the date it lodges. Confirm that date with the tax agent before lodging, because lodging early can bring the documentation deadline forward.

That deadline can fall after the end of the income year in which the company advanced the money. Keep the advance year and the company's lodgment date together in the file, rather than assuming every relevant task has the same year-end deadline.

The agreement deadline and annual repayment deadline serve different purposes. Combining them into a single reminder labelled tax paperwork is how an otherwise organised owner can miss the important distinction.

Use the calculator with reconciled inputs

The ATO Division 7A calculator and decision tool uses the loan's income year, previous year-end unpaid amount, actual term, and repayment dates and amounts. It returns the minimum yearly repayment, interest payable to the company and closing balance.

The calculator's interest and closing balance match the agreement's obligations only where the agreement uses the benchmark rate. If the contract requires a higher rate, reconcile the contractual obligation separately rather than assuming the calculator settles both questions.

The tool also can't reliably forecast future-year repayments before the relevant benchmarks are available. A planning estimate may help with budgeting, but it shouldn't be filed as the final compliance calculation.

Cash-flow discipline: Budget for the payment from money the borrower can actually access, not from an expected accounting profit.

For a broader budgeting framework, Your Success Shift's guide to cash planning for Australian and NZ businesses can help organise expected inflows and outflows. The Division 7A calculation itself should remain anchored to the ATO method and the agreement.

A workable annual habit is to update the calculation after the benchmark is published, organise payment well before year-end and retain bank evidence with the signed agreement. The spreadsheet is useful, but it can't transfer the money.

Loans Trusts and the Bendel Distinction

Not every balance between a trust and a corporate beneficiary is automatically a loan. Ask what transaction occurred before deciding that a Division 7A loan agreement is the answer.

The ATO legal database material on Commissioner of Taxation v Bendel records the High Court's distinction between an ordinary loan and an unpaid corporate beneficiary entitlement where the company did nothing with the entitlement. That distinction doesn't remove the need to examine subsequent transactions.

An unpaid present entitlement means the beneficiary is presently entitled to trust income but hasn't been paid that entitlement. That isn't necessarily the same transaction as the company advancing money to the trustee or agreeing to genuine financial accommodation.

A corporate beneficiary is a company entitled to benefit under a trust. The company's presence doesn't turn every trust ledger balance into the same legal arrangement.

Follow later movements of value

Subdivision EA contains integrity rules that may matter where trust funds are subsequently paid or lent to a shareholder or associate. Section 100A, dealing with certain reimbursement agreements, is a separate risk where the entitlement and the person receiving the economic benefit don't align in the relevant way.

Bendel shouldn't be treated as permission for later payments, loans or debt forgiveness to pass unchecked. Equally, an existing genuine borrowing shouldn't be relabelled as a passive entitlement merely because that description appears more convenient.

The ATO also indicates that a retained corporate beneficiary entitlement can be placed on complying loan terms, with minimum yearly repayments then required. Choosing that route creates obligations that need to be administered.

Our guide to discretionary trust taxation provides context for the distribution side of the arrangement. Before drafting, map the parties, entitlement date, cash movements, loan obligations and any later recipient of value.

A Hornsby Supermarket Loan in Practice

Take Lisa, a hypothetical Hornsby supermarket owner whose company advances $80,000 during 2026–27 for a personal expense. Her real question is whether the advance can be properly characterised, documented and repaid, not whether she can get a signature on a page. If the money is a direct company loan and she leaves it outstanding, she could face deemed unfranked dividend treatment, meaning a taxable dividend with no company franking credit attached.

Had the $80,000 reached her through a trust borrowing or a retained entitlement instead, the document she signs would need to match that arrangement. A loan deed describing the wrong transaction gives her a tidy folder and the same exposure.

Compare the obligations, not just the instalment

An ordinary complying loan could give Lisa a documented repayment pathway without the qualifying real-property mortgage. Her tax agent would still need to establish the correct advance year, documentation deadline and first repayment year, rather than treating the signing date as the start of every obligation.

The qualifying property-secured pathway could stretch the repayment period and lower the annual principal-and-interest demand. The trade-off is that real property becomes security for the company debt, with the legal documentation and the original property-value test needing attention.

She should not pull an interest figure from an old online example. Her calculation needs the ATO benchmark for the relevant repayment year and the remaining loan term, recalculated as later rates are published.

A smaller annual repayment may mean carrying the debt, the interest and the property obligations for more years.

A repayment shortfall may itself be treated as a dividend, depending on the applicable rules and circumstances. Interest received also belongs in the company's assessable income, so the borrower's schedule and the company accounts need to agree.

From our practice

I would map each advance year before preparing one tidy agreement for an old director's loan balance. In Lisa's case, that means separating the supermarket's trading cash, her personal drawings and any earlier advances before the closing ledger figure gets treated as a single loan.

If the $80,000 were treated as a deemed unfranked dividend, it would generally be added to Lisa's assessable income and taxed at her marginal rates alongside her other income. What that produces in dollar terms depends on her total taxable income for the year, so her tax agent should confirm the dividend treatment and any applicable limitations before estimating the outcome.

The broader decision also sits alongside her household commitments and the reserves the supermarket needs for slow trading weeks. Our wealth management for business owners discussion provides context for connecting owner decisions with longer-term plans.

Questions to Settle Before You Sign or Lodge

A signed agreement fixes nothing if it labels the transaction wrongly. Before anything is signed or lodged, map what the money was: a direct loan from the company, a borrowing routed through a trust, or an unpaid present entitlement still sitting on the trust's books after Bendel. These questions test whether the arrangement can operate properly, rather than merely look complete in the year-end folder.

Does a deed signed after lodgment day repair the year?

Generally, no. A deed signed after the company's lodgment day doesn't retrospectively satisfy the written-agreement requirement for that year's loan, so don't backdate documents and don't assume the return can be lodged first and tidied later. A registered tax agent should review what occurred, the relevant deadlines and whether any statutory relief or other treatment may be available.

Can repayments be one journal at year-end?

A journal alone generally doesn't satisfy the 30 June payment rule where no repayment has occurred. One arrangement that can work is a documented set-off: the company declares a dividend, and the shareholder agrees in writing to apply that entitlement against the loan balance. For that to hold, the tax agent should hold the dividend declaration or resolution, the shareholder's written direction and a loan ledger showing the amount applied, each dated on or before 30 June. Keep the evidence together under a consistent approach to ATO record-keeping requirements.

What if the benchmark changes next year?

Benchmark recalculation means checking the applicable annual rate and recalculating the required repayment on the remaining balance and remaining term. The previous rate doesn't automatically roll forward, so the repayment schedule needs updating each year. Check the agreement's interest mechanism too, especially where the contractual rate differs from the benchmark the ATO calculation uses.

Does Bendel mean unpaid trust entitlements need no agreement?

Bendel and later payments still need separate analysis. A passive unpaid entitlement isn't automatically a loan. A genuine borrowing, or subsequent movements of value, may engage other rules, and Subdivision EA and section 100A may remain relevant even where the entitlement itself isn't a Division 7A loan. The labelling decision does real work here: documenting a passive entitlement as a loan may concede treatment the law never required, and treating a genuine borrowing as a mere entitlement may unravel under review.

Who should review the arrangement?

A registered tax agent should review the tax obligations, with a lawyer where security or trust deeds are involved. A general business income tax calculator may support broader company-tax budgeting, though it can't classify the transaction, establish mortgage validity or replace the ATO's Division 7A repayment calculation.

At Everglow, the accountant and financial planner talk to each other, so tax, investments, super and borrowing point in the same direction. The company and trust tax service covers working papers, technical review and owner planning, with fees agreed in writing before work begins. Where borrowing is part of the answer, Everglow introduces clients to a broker it has vetted rather than arranging the loan itself.

A Division 7A loan agreement may prevent dividend treatment when the transaction is correctly identified and the writing, rate, term and required year-end repayments all align. The appropriate treatment depends on your circumstances, particularly where trusts or historical balances are involved.

Liability limited by a scheme approved under Professional Standards Legislation. Everglow is an authorised representative under AFSL 384713.

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