Division 7A: Managing Shareholder Loans and Dividend Strategies

Key takeaway: Money a private company lends or pays to its shareholders or their associates is generally taxed as an unfranked dividend unless it is repaid, or put under a complying loan agreement, before the company's tax return is due. The benchmark interest rate for 2026–27 is 8.77%. In June the High Court confirmed that an unpaid trust distribution owed to a company is not, by itself, a loan for Division 7A purposes.

Background

Division 7A stops private company profits reaching shareholders and their associates without being taxed as dividends. It covers payments, loans and forgiven debts, including amounts drawn through related trusts. Where it applies, the amount is treated as an unfranked dividend in the recipient's hands, up to the company's distributable surplus.

A loan avoids that outcome if it is repaid before the company's lodgment day or put on complying terms by then. A complying loan must:

• be in writing before the lodgment day;

• charge interest at no less than the benchmark rate each year;

• run for no more than 7 years if unsecured, or 25 years if secured by a registered mortgage over real property worth at least 110% of the loan; and

• receive a minimum yearly repayment by 30 June each year.

What has changed

The benchmark rate rose to 8.77% for 2026–27, from 8.37% in 2025–26. It is based on the RBA's published housing lending rate before the income year began, so it stays fixed for the year. A $100,000 unsecured loan made in 2025–26 now requires a minimum repayment of $19,715.97 by 30 June 2027, of which $8,770 is interest.

The High Court decided Commissioner of Taxation v Bendel on 10 June 2026. By a 5–2 majority, it held that a trust's unpaid present entitlement owed to a corporate beneficiary is not, of itself, a loan from the company to the trust under Division 7A. This rejects the ATO's view, held since 2009, that such entitlements could be loans once left unpaid. The ATO has said it will follow the decision for entitlements within its scope.

Bendel does not remove Division 7A from trust structures. Amounts a trust actually pays or lends to shareholders while a company's entitlement is unpaid can still be caught. Other integrity provisions remain, and commentators have noted the Government could legislate to reverse the outcome.

Who is affected

• Owners and directors who draw funds from their company beyond salary and declared dividends.

• Family groups where a discretionary trust distributes to a corporate beneficiary.

• Groups with existing complying loans, whose repayments are now calculated at 8.77%.

• Businesses preparing for sale or investment, where buyers expect shareholder loans to be cleared.

Commercial implications

Repayments at 8.77% are a real cash commitment. On larger balances, the minimum repayment can rival a year's discretionary drawings. It has to be planned alongside tax instalments, debt service and working capital.

Many groups fund repayments by declaring franked dividends and offsetting them against the loan. This can work well, but the dividend is assessable to the shareholder. The offset also needs proper documentation: a resolution, a clear set-off and matching entries in the company's records.

For trusts with corporate beneficiaries, Bendel gives more room to leave entitlements unpaid. It is not a reason to unwind arrangements without advice. Where an entitlement has already been placed on complying loan terms, the right course depends on the documents and the dates involved.

Recommended considerations

1. Reconcile all shareholder and associate loan accounts before year-end, including amounts paid on behalf of shareholders.

2. Put new loans on written complying terms before the company's lodgment day.

3. Calculate 2026–27 minimum repayments at 8.77% now and plan the cash or dividends to meet them by 30 June 2027.

4. Document any dividend set-off with a resolution and consistent ledger entries.

5. Review trust distribution resolutions and unpaid entitlements in light of Bendel, and watch for any legislative response.

6. Before a sale, capital raising or refinancing, clear or formalise shareholder loans early.

Sources

• ATO, Division 7A – benchmark interest rate

• CA ANZ, Bendel HC decision clarifies Div 7A treatment of unpaid present entitlements

• The Tax Institute, High Court rules in favour of Bendel

• Moore Australia, Bendel appeal dismissed: where to from here?

Speak with Reset Group. We can review your loan accounts, calculate 2026–27 repayments and plan a dividend strategy that fits your group. Call +61 2 8208 3314 or email info@resetgroup.com.au.

General information only, current at 30 October 2026. It does not take your circumstances into account and is not advice. Liability limited by a scheme approved under Professional Standards Legislation.