Yearly repayments on Division 7A loans

The ATO has identified a number of common mistakes that are being made by taxpayers in relation to Division 7A, which has prompted a series of webinars and articles to educate practitioners and taxpayers on key aspects of these rules.

This latest article focuses on making minimum yearly repayments.

When a private company makes a loan to a shareholder or associate, a common way of ensuring the loan is not treated as a deemed unfranked dividend under the Division 7A rules is to place the loan on complying loan terms by the relevant deadline.

While this can prevent a Division 7A issue in the year the loan is made, it is important to remember that borrowers must make the required minimum annual repayments in the subsequent years after the loan is made. If this is not done, a deemed dividend can be triggered on the shortfall of any repayments in that year.

When it comes to making yearly repayments, the ATO is seeing common mistakes being made and is reminding borrowers of the following:

Repayments start in the year after the loan was made;
To use the correct benchmark interest rate to calculate the minimum repayments for the year (noting that the interest rate changes each year); and
To make the required annual repayments on the loan by the end of the income year.

Just also be careful to ensure that repayments are not being made by borrowing additional amounts from the same company. This is because there are specific provisions in the Division 7A rules that can prevent these repayments from being taken into account.

Division 7A is an ATO focus area. While it is important for practitioners to ensure they are correctly identifying and managing Division 7A problems in the year the loans are made, it is also critical to make sure that any ongoing requirements relating to minimum annual repayments are being met in the following years.

More Information

Division 7A – Minimum Repayments