Division 7A Deep Dive

If you thought Division 7A compliance was all about keeping loan agreements tidy and tracking interest rates — think again.

The ATO’s latest Taxation Determination TD 2025/5 has turned the spotlight on an issue that’s long been quietly debated: what really counts as a “repayment”?

Spoiler: not all repayments are created equal.

The Core Rule — Section 109R

Section 109R of the Income Tax Assessment Act 1936 is designed to stop shareholders and their associates from repaying Division 7A loans one day and borrowing the funds straight back the next.

It does this by disregarding repayments that are effectively funded by new or intended loans from the same company.

Two key triggers apply:

Intention limb: a reasonable person would conclude the borrower intended to re-borrow a similar or larger amount.
Pre-borrowing limb: the borrower had already obtained a similar or larger loan to fund the repayment.

Once triggered, that repayment is ignored — it won’t reduce the loan balance under s 109D or count towards the minimum yearly repayment (MYR) under s 109E.

What TD 2025/5 Clarifies

The ATO now formally states that Section 109R applies to both actual and notional loans — those deemed under s 109T (interposed entities) and s 109W (notional repayments through trusts).

So even if the repayment never passes through the company’s bank account, if the flow of funds effectively comes from the same company, the ATO can disregard it.

This extension hits common family-group scenarios — UPE sub-trusts, trust-to-company-to-trust loan cycles, and group cash-pooling arrangements.

In other words, “repaying” a Division 7A loan with money that ultimately came from the same company doesn’t wash anymore — even if the paperwork looks compliant.

Carve-Outs and Safe Harbours

Not everything is caught. Section 109R(3)–(4) preserves certain genuine transactions:

Set-offs against dividends or wages,
Third-party payments of assessable income, and
Property transfers made on arm’s-length terms.

The determination also acknowledges limited refinancing exceptions in s 109R(5)–(7) — e.g. when converting a 7-year loan to a 25-year loan or restructuring under a bank-mandated subordination.

Still, the ATO’s message is clear: commercial substance matters more than form.

A Simple Example

Banana Co lends $200 k to Apple Trust in 2023.

Apple Trust “repays” the loan in May 2024 — but soon after, Banana Co lends $205 k to Orange Co, which on-lends it back to Apple Trust.

Under s 109T, a notional loan arises from Banana Co to Apple Trust.

Under s 109R, the earlier repayment is disregarded.

The outcome? A deemed dividend under s 109D.

Final Thoughts

TD 2025/5 is more than a technical adjustment — it’s a statement of intent.
The ATO wants to close the gap between the legal form of Division 7A compliance and the economic reality of how funds move in private groups.

As Peter Adams summed it up in our September session:

“Assume section 109R looks through everything — because the Commissioner now does.”