By Pinar Acay
Division 7A of the Income Tax Assessment Act 1936 is a key consideration in succession planning for private companies in Australia. It is designed to prevent shareholders or their associates from accessing company profits in the form of loans or payments without paying appropriate tax. In the context of succession planning, these loans can complicate the transfer of assets and ownership within families or to beneficiaries unless carefully managed.
What is a Division 7A Loan?
Division 7A applies when a private company provides a loan, payment or forgiveness of debt to a shareholder (or their associate) without a complying loan agreement. If such arrangements are not properly structured, they are treated as deemed dividends and taxed as unfranked dividends in the hands of the recipient, potentially triggering significant tax liabilities.
To avoid this, loans must be documented under a complying Division 7A loan agreement with:
- A maximum term of 7 years (unsecured) or 25 years (secured by real property); and
- A benchmark interest rate (set annually by the ATO); and
- Minimum yearly repayments.
Succession Planning
In succession planning, particularly for family businesses or trusts with corporate beneficiaries, Division 7A loans often arise from:
- Unpaid present entitlements (UPEs) to private companies.
- Loans from the company to family members.
- Distributions retained in the company but attributed to individuals.
These loans must be addressed to ensure a smooth transfer of assets and prevent unintended tax liabilities for beneficiaries or incoming owners.
In a recent case of significant importance, Commissioner of Taxation v Bendel [2025] FCAFC 15, the Full Federal Court held that UPEs owing from a trust to a corporate beneficiary do not constitute a “loan” under Division 7A. The ATO has filed a special leave application with the High Court to overturn the decision.
Settlement Strategies in Succession Planning
- Repayment Before Transfer
The simplest approach is to repay the Division 7A loan before the succession event. This avoids triggering a deemed dividend and simplifies the estate. Repayments can be made in cash, by offsetting entitlements or through restructuring arrangements.
- Maintaining the Loan Within a Complying Agreement
If immediate repayment is not feasible, the successor (often a family member or trust) may assume responsibility for ongoing minimum yearly repayments under the existing Division 7A agreement. This ensures no deemed dividend arises and the loan remains compliant.
- Debt Forgiveness—With Caution
Forgiving a Division 7A loan is generally not tax effective. While it may seem like a solution during succession, forgiveness triggers a deemed dividend in the hands of the borrower unless specific exceptions apply. This is usually avoided unless the tax consequences are manageable.
- Refinancing the Loan
The successor can refinance the Division 7A loan through external finance, repay the company and then manage repayments independently. This removes Division 7A implications going forward but requires careful planning and financial capacity.
- Using Testamentary Trusts
Where succession involves estate planning, a testamentary trust can be used to receive estate assets and manage any Division 7A obligations. However, loans to the trust must still comply with Division 7A rules if the trust is an associate of a shareholder.
- Corporate Restructuring
As part of succession planning, families may restructure the group under Division 328-G (small business restructure rollover) or other tax provisions, enabling the movement of assets and liabilities (including loans) without triggering immediate tax consequences. Division 7A loans can sometimes be addressed as part of this process.
Estate Planning Considerations
When a shareholder dies with an outstanding Division 7A loan, the loan does not automatically disappear. The estate may inherit the obligation and repayments must continue to avoid deemed dividends. Executors need to:
- Identify Division 7A loans in the deceased’s estate.
- Ensure they are documented and compliant.
- Factor them into estate asset valuations and settlement.
In some cases, the ATO may allow extensions or special arrangements, particularly if the estate is complex or illiquid.
Key Takeaways
- Division 7A loans must be actively managed in succession planning to avoid tax issues.
- Options include repayment, compliance via agreements, refinancing, or structuring through testamentary or discretionary trusts.
- Loans should be clearly documented and included in estate or business succession strategies.
- Specialist tax and legal advice is essential to ensure compliance and optimal outcomes.
This information is general in nature and not a substitute for legal advice based on your individual circumstances. For tailored advice about your situation, speak with our senior partner Richard Mackenzie or estates lawyer Pinar Acay on (03) 8621 1000 or (03) 9331 1144.
