Division 7A Loan Agreement Requirements (2025-26)
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Primary tax-year context: 2025-26
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A Division 7A loan is not compliant just because money moved between accounts. The written agreement — and when it is signed — is what determines whether that loan stays a loan or becomes a taxable dividend.
Why the agreement must be in writing
Under Division 7A of the Income Tax Assessment Act 1936, a private company loan to a shareholder (or their associate) is treated as an unfranked dividend unless a complying written loan agreement is in place. The agreement must be executed before the company’s lodgment day for the income year in which the loan was made. There is no extension for verbal agreements or informal understandings — they simply do not qualify.
If the company lodges its tax return on 28 October and the agreement is signed on 1 November, the loan fails. The entire principal becomes an unfranked dividend assessed in the shareholder’s hands.
What the agreement must specify
A complying Division 7A loan agreement must include all of the following:
1. Loan amount The principal amount of the loan must be clearly stated. If multiple advances are made, each advance should be documented, or a single agreement should cover the total facility with draw-down provisions.
2. Loan term The maximum term depends on whether the loan is secured:
- Unsecured loan: maximum 7 years
- Secured loan: maximum 25 years
To qualify as a secured loan, the company must hold a registered mortgage over real property as security. A charge over other assets, a personal guarantee, or an unregistered interest does not satisfy this requirement. The property value must also be sufficient to support the loan at the time security is taken.
3. Interest rate The agreement must specify that interest is charged at at least the benchmark rate. For 2025-26, the benchmark interest rate is 8.37%. The agreement can reference the benchmark rate by formula (so it updates each year automatically) rather than a fixed percentage — this avoids the need to amend the agreement annually.
If the agreement specifies a rate below the benchmark, the shortfall in interest is treated as a deemed dividend each year.
4. Minimum yearly repayment The agreement must require minimum yearly repayments. The actual amount is calculated using the amortisation formula (see the companion article on the MYR formula), but the obligation to make repayments must be written into the agreement itself.
With agreement vs without agreement
| Situation | Tax outcome |
|---|---|
| Complying written agreement in place by lodgment day | Loan remains on foot; MYR required by 30 June each year |
| Agreement missing, late, or non-compliant | Entire loan balance treated as unfranked dividend |
| Agreement in place but repayment shortfall | Shortfall amount treated as unfranked dividend |
| Loan forgiven by company | Outstanding balance treated as unfranked dividend |
The cost of getting it wrong: a worked example
Suppose a company makes a $200,000 loan to a shareholder in the 2025-26 income year and no written agreement is executed before lodgment day.
The ATO treats the $200,000 as an unfranked dividend. The shareholder has no franking credits to offset the tax. At the top marginal rate of 45% plus the 2% Medicare levy, the tax bill is approximately $94,000 — nearly half the loan amount, payable in the year of assessment.
With a proper complying agreement instead, the shareholder would be required to make minimum yearly repayments of roughly $38,000 per year on an unsecured 7-year loan. That is a manageable obligation. The $94,000 tax bill is avoided entirely.
Common drafting mistakes
Verbal agreements No verbal agreement qualifies under Division 7A, regardless of how clear the understanding is between the parties. The ATO has confirmed this repeatedly in its guidance.
Agreements signed after lodgment day This is the most common failure point. The agreement must exist before the company lodges its tax return for the year the loan was made. Many practitioners leave documentation to the accountant’s preparation phase — by then it is often too late.
Missing interest rate clause An agreement that specifies repayments but does not address the interest rate, or sets a rate below the benchmark, does not comply. Always include an explicit benchmark rate reference.
Security that does not qualify A loan secured only by a personal guarantee or a charge over equipment does not qualify for the 25-year term. Only a registered mortgage over real property satisfies the security requirement. Mis-classifying an unsecured loan as secured shrinks the permissible term from 25 years to 7 years — meaning all repayments calculated on a 25-year schedule will fall short.
Informal loan accounts with no formal agreement Where a shareholder’s loan account builds up over multiple years through reimbursements, wages not paid, and sundry advances, each year’s net balance may need to be covered by a complying agreement. Multiple loans require careful tracking; a single omnibus agreement covering all advances is generally cleaner but must be reviewed each year.
Practical controls
- Use a single template for each loan type (secured and unsecured) and review it annually against the current benchmark rate.
- Date-stamp agreement execution and store it with the company’s permanent records.
- Record the benchmark rate in the working papers each income year, even if the agreement auto-references it.
- Reconcile the loan account balance and repayment history each quarter, not just at 30 June.
- Use the Division 7A calculator to confirm repayments match the agreed terms before lodgment day.