Division 7A, Notional Loans and the ATO’s Latest Draft

TD 2025/D2

Let’s be honest — Division 7A has never been light reading. And just when we start to feel comfortable navigating the usual repayment options, TD 2025/D2 lands in our inbox, reminding us that the waters run deeper than we thought.

This new draft determination focuses on section 109R — the anti-avoidance rule that disregards repayments made to private companies when those repayments are, in effect, recycled through new loans. But what really caught my attention is how the ATO is extending that logic to notional loans under the interposed entity rules (sections 109T and 109W).

So, what’s this draft really saying?

At its core, the ATO is saying:

If a notional loan arises (because an entity interposes itself between a company and a shareholder or associate), and
The repayment of that loan is funded by a new loan — even indirectly from the company itself,

…then section 109R can kick in, and the repayment will be ignored.

In plain terms: if you're repaying a Division 7A loan with money that came from a roundabout loan back from the company, that repayment doesn’t count. The deemed dividend risk remains.

This applies even to notional loans, where the cash might not have actually moved — just been deemed to have done so under the interposed entity provisions.

Why is this important?

For many private groups, we already tread carefully around the Division 7A minefield — documenting loans, managing minimum yearly repayments, and juggling inter-entity transactions. But this draft signals that you can't just pay off one Division 7A loan and then redraw in a slightly different way — not even when it’s a notional transaction.

The ATO’s position here is aggressive: they’re treating notional loans as real for the purpose of repayments, but denying you the benefit when it comes to avoiding deemed dividends. That’s a pretty one-sided view — and yes, they’ve acknowledged there are alternative interpretations, but the Commissioner isn’t buying them.

How this will impact in practice

This will impact groups that rely on loan clean-up strategies — especially those with circular cash movements or back-to-back lending through interposed entities. It may also change how we approach year-end trust distributions, particularly where private companies sit in the group and are used for cash flow recycling.

If this draft is finalised in its current form, I’d expect the ATO to be more aggressive in reviewing Division 7A repayment patterns — even where everything has been structured “on paper” to comply.

Also worth noting: when finalised, the determination will apply both prospectively and retrospectively — so this isn’t just about new arrangements going forward.

What to Do Now

Here’s how many practitioners are likely to respond in practice:

Reassessing Division 7A repayment arrangements across private groups with layered or circular lending.

Reviewing notional loans under sections 109T and 109W, particularly to understand how repayments have been funded and whether they may be disregarded under section 109R.

Approaching internal refinancing or interposed structures with caution, given the ATO’s stated position and increased focus.

Advising clients that certain repayments may be ineffective, especially where funding appears to be recycled, and encouraging clearer, cash-based repayment strategies where possible.

Division 7A is already a complex area, and TD 2025/D2 increases the stakes. The determination reflects the ATO’s ongoing shift toward assessing the substance of loan arrangements, not just their legal form. Where repayments resemble circular funding or lack genuine economic effect, the risk of a deemed dividend remains high.

Submissions on the draft are open until 17 April 2025, but in the meantime, it's wise to stress-test existing structures and address any exposure points before administrative action follows.