Division 7A in 2025

Division 7A has always been the quiet disruptor of private-group tax planning. It doesn’t roar like transfer-pricing or DPT, but every few years it surfaces with something that keeps advisers awake at night.

This year it’s a mix of familiar and fresh: a small drop in the benchmark rate, a new determination that closes a long-standing loophole, and a louder message from the ATO about intent over form.

Still the same beast

At its core, Division 7A of Part III, ITAA 1936 is an integrity rule designed to stop private companies from distributing profits to shareholders and associates tax-free.

That principle hasn’t changed — but the way it bites has.

A “loan” now reaches well beyond a simple advance of cash. It captures any form of financial accommodation or payment made with an expectation of repayment — whether that money travelled directly from the company or took a scenic route through a trust or related entity.

And in group structures with UPEs, sub-trusts and corporate beneficiaries, that net is wider than ever.

A quieter headline: the new benchmark

The ATO has shaved the benchmark Division 7A interest rate to 8.37 % for 2025-26 (down from 8.77 %)..

It looks modest on paper, but for anyone running multiple compliant loans it will alter minimum-yearly-repayment calculations and distributable-surplus testing.

A small change in rate can flip a loan from compliant to problematic. Update schedules early — because a missed repayment doesn’t just attract interest; it converts straight into an unfranked dividend.

TD 2025/5 — putting an end to the “boomerang repayment”

The bigger story is the ATO’s Taxation Determination 2025/5.

It clarifies that Section 109R — the provision that disregards certain repayments — applies not only to actual loans but also to notional ones under ss 109T and 109W.

In short, repaying a Division 7A loan with money that ultimately came from the same company no longer works.
The Determination formalises what many of us suspected: “repay-and-reborrow” strategies are now dead.

The ATO’s test is simple:

if a reasonable person would conclude there was an intention to re-borrow a similar or larger amount, or
if the borrower had already obtained such a loan to fund the repayment,
the repayment is ignored.

No reduction in balance, no credit toward the minimum-yearly repayment — just a deemed dividend waiting in the wings.

The grey that remains

Not everything will be disregarded.

Genuine set-offs against dividends or wages still stand, and bona-fide refinancing (say, a 7-year loan converting to a 25-year loan under a documented arrangement) remains acceptable.

But if the flow of cash even looks circular, expect the Commissioner to trace it.

What smart advisers are doing

The practitioners who’ll stay ahead of this are the ones re-mapping loan flows now — before the 2026 year closes.

They’re testing the source of each repayment, tightening documentation, and reminding clients that Division 7A isn’t about how tidy the file looks; it’s about whether the funding makes commercial sense.

Sub-trusts that have quietly rolled over for years are being reviewed.
s 109N agreements are being re-executed at current rates.
And where things get messy, some are seeking private rulings rather than gambling on silence.

Where the ATO is heading

Division 7A enforcement is entering its next phase — one focused less on checklists and more on behaviour.

The new benchmark rate might be lower, but the expectations are higher: prove that repayments are real, external and permanent.

Or, as Peter Adams summed it up during the September update:

“If the money comes home again, it was never really gone.”