Why Division 7A Matters for Property Investment
Many private companies provide funds to shareholders or their associates for various purposes, including investment property purchases. Under Division 7A of the Income Tax Assessment Act 1936, if these financial arrangements don't meet strict requirements, the ATO may treat them as deemed unfranked dividends, potentially triggering significant adverse tax consequences.
This is particularly important when funds are used for income-producing investments such as property, where proper structuring can unlock valuable negative gearing benefits while maintaining tax compliance.
Understanding Division 7A Loan Requirements
To ensure compliance and avoid deemed dividend treatment, a Division 7A loan must satisfy four essential requirements:
1. Written Loan Agreement
A formal written loan agreement must be executed before the company's lodgment date for the relevant financial year. This cannot be backdated or created retrospectively.
2. Benchmark Interest Rate
Interest must be charged at or above the ATO's yearly benchmark rate. For the 2024-25 financial year, this rate is 8.77%. The rate is reviewed annually and must be applied consistently.
3. Maximum Loan Terms
Loan terms are strictly limited based on security:
- Unsecured loans: Maximum 7 years
- Secured loans (against real property): Maximum 25 years
4. Minimum Annual Repayments
Borrowers must make minimum yearly repayments calculated using the ATO's Division 7A Calculator. These repayments include both principal and interest components.
Critical Warning: Failure to meet any of these requirements transforms the loan into a deemed dividend, potentially taxed at personal marginal rates (up to 47%) without franking credits.
Using Division 7A Loans for Negative Gearing
When properly structured, Division 7A loans can effectively fund investment property purchases while providing negative gearing benefits:
The Investment Strategy
- Company provides loan: The private company lends funds to the shareholder/associate
- Property purchase: Loan proceeds are used for property deposit or full purchase
- Interest deduction: Interest expenses on the loan are typically tax-deductible in the property owner's hands
- Negative gearing benefit: When total costs (including interest) exceed rental income, the loss offsets other taxable income
Practical Example
Consider this scenario:
- Company lends $500,000 at 8.77% interest
- Annual interest cost: $43,850
- Annual rental income: $35,000
- Other property expenses: $5,000
- Net loss: $13,850 (deductible against other income)
For a taxpayer in the 39% tax bracket, this $13,850 loss provides approximately $5,401 in tax savings.
2025 Game Changer: The Bendel Case Impact
In February 2025, the Full Federal Court delivered a unanimous landmark ruling in Commissioner of Taxation v Bendel that fundamentally changed the Division 7A landscape, particularly regarding Unpaid Present Entitlements (UPEs).
What the Court Decided
The Court held that an unpaid present entitlement (UPE) from a discretionary trust to a corporate beneficiary is not automatically a "loan" under section 109D(3) of the Income Tax Assessment Act 1936. This overturned the ATO's position held since 2009.
Key Legal Reasoning
The Court distinguished between:
- UPEs: Create an expectation of payment, not a legal obligation to repay
- Actual loans: Involve active lending with repayment obligations
Without a positive transaction or advance by the company, a UPE does not constitute a "loan" for Division 7A purposes.
Revised Understanding: UPEs and Entity Layering
The Bendel decision has created both opportunities and continued uncertainties:
Potential Relief from Bendel
- UPEs resembling the Bendel facts should no longer trigger automatic Division 7A consequences
- Taxpayers may consider objections or amendments on past assessments where complying loans were unnecessarily implemented
- Simplified compliance for straightforward UPE arrangements
Remaining Risks and Cautions
Despite the Bendel victory, several risks remain:
ATO Appeal and Interim Position
The ATO has lodged for special leave to appeal to the High Court and maintains its current interpretation through an Interim Decision Impact Statement. The ATO continues to apply TD 2022/11 until the appeal concludes.
Subdivision EA Still Applies
The Court emphasized that while Section 109D may not capture simple UPEs, Subdivision EA may still trigger deemed dividends, particularly when trust funds flow through to individuals or shareholder associates.
Section 100A Integrity Rules
Complex arrangements involving UPEs may still fall under Section 100A (reimbursement agreements) if designed to avoid tax.
Updated Risk Assessment Table
| Issue | Pre-2025 Position | Post-Bendel Position | Remaining Risks |
|---|---|---|---|
| UPE treated as Division 7A loan | Yes – based on TD 2022/11 | Not if no repayment obligation exists | Subdivision EA, Section 100A still apply |
| Complying loan required | Yes, to avoid deemed dividend | Less necessary for standalone UPEs | Complex layering may trigger EA |
| Past assessment corrections | Unlikely to be beneficial | May support objections/amendments | Time limits and procedural hurdles |
| ATO enforcement stance | Strong enforcement of TD 2022/11 | Waiting on High Court outcome | Interim statement upholds current view |
Essential Compliance and Risk Management
Whether dealing with traditional Division 7A loans or post-Bendel UPE arrangements, certain compliance principles remain critical:
Avoid Circular Repayment Schemes
The ATO actively targets circular or round-robin repayments (such as repaying one loan with another loan from the same company). These arrangements are treated as anti-avoidance schemes and may be disregarded.
Maintain Comprehensive Documentation
Essential records include:
- Signed loan agreements with clear terms
- Repayment schedules and evidence of payments made
- Bank records showing fund flows
- UPE tracking and annual reconciliations
- Annual interest and principal breakdowns
- Property purchase documentation linking loan proceeds to investment
Regular Compliance Reviews
Given the evolving nature of Division 7A law, particularly post-Bendel, regular reviews ensure ongoing compliance and optimization of tax positions.
Maximizing Negative Gearing Benefits
Negative gearing remains a popular and legitimate investment strategy in Australia when properly implemented:
Deductible Expenses
Beyond loan interest, investment property owners can claim:
- Property management fees
- Repairs and maintenance
- Insurance premiums
- Council rates and land tax
- Depreciation on building and fixtures
- Travel expenses for property inspections
Tax Offset Calculation
The tax benefit of negative gearing depends on your marginal tax rate:
- 32.5% tax bracket: $10,000 loss = $3,250 tax saving
- 39% tax bracket: $10,000 loss = $3,900 tax saving
- 47% tax bracket: $10,000 loss = $4,700 tax saving
Interest Deductibility
Importantly, interest on Division 7A loans used for investment purposes is generally deductible, even when borrowing from your own company, provided the loan is used to generate assessable income.
Compliance Checklist
Use this checklist to ensure your Division 7A loan and investment structure remains compliant:
| Requirement | Status | Risk if Non-Compliant |
|---|---|---|
| Written loan agreement executed before lodgment | ✅ Mandatory | Deemed dividend treatment |
| Benchmark interest rate applied (8.77% for 2024-25) | ✅ Required | Deemed dividend on shortfall |
| Maximum term observed (7 or 25 years) | ✅ Strict limit | Deemed dividend treatment |
| Annual minimum repayments made | ✅ Use ATO calculator | Unpaid amount treated as dividend |
| Loan proceeds used for investment property | ✅ Must be traceable | Interest deductibility at risk |
| No circular repayment structure | ✅ Avoid back-to-back loans | Anti-avoidance provisions apply |
| Documentation maintained for 5+ years | ✅ Audit-proof position | Difficulty defending position |
| Post-Bendel UPE review completed | ⚠️ Consider professional advice | Missed optimization opportunities |
Strategic Considerations for 2025 and Beyond
The intersection of Division 7A compliance and investment property financing requires careful strategic planning:
Timing Considerations
- Execute loan agreements well before company lodgment dates
- Consider timing of property purchases to optimize cash flow
- Plan repayment schedules around other tax obligations
Structure Optimization
- Evaluate whether unsecured or secured loan terms better suit your situation
- Consider multiple smaller loans versus single large loans
- Assess family trust structures in light of Bendel implications
Professional Advice
Given the complexity of Division 7A laws and recent changes from the Bendel case, professional advice is essential for:
- Initial structure design and implementation
- Ongoing compliance monitoring
- Assessment of existing arrangements post-Bendel
- Property acquisition and financing strategies
Key Takeaways
Division 7A loans remain a powerful tool for funding investment property purchases while accessing negative gearing benefits, but they require meticulous compliance and strategic planning.
The Bendel case has introduced both opportunities and uncertainties, particularly around UPEs and entity layering. While some arrangements may now be less risky, the ATO's appeal and interim position mean caution is still warranted.
Success with Division 7A loan strategies depends on:
- Strict compliance with all four essential requirements
- Comprehensive documentation and record-keeping
- Regular review of structures and changing law
- Professional guidance for complex arrangements
- Strategic integration with broader investment and tax planning
When properly implemented, these strategies can provide significant tax advantages while building wealth through property investment. However, the stakes are high, and the compliance requirements are strict – making professional advice not just recommended, but essential for optimal outcomes.