10-year Division 7A loans


A number of recommendations have been made to overhaul the treatment of Division 7A complying loans by the Treasury. The proposals recommend to begin these changes from 1 July 2019.

Proposed changes

Consistent with current practices, the 10-year loans would effectively begin at the end of the income year in which the advance is made. This will allow the taxpayer to put the loan on complying terms before the due date of the tax return. The Benchmark interest rate to compare with a small business variable overdraft at 8.30%.

Transitional rules

7-year unsecured loans

All complying 7 -year loans in existence as at 30 June 2019 must comply with the new proposed loan model. The new benchmark interest rate is to be used, and the existing outstanding term will be retained. As mentioned above, the principal repayment must be in equal instalments over the loan term.

25-year secured loans

Exempt from the majority of changes until 30 June 2021. However, the new benchmark interest rate needs to be used (at a minimum) between 1 July 2019 and 30 June 2021.

On 30 June 2021, the outstanding value of the loan will be a deemed dividend unless it is put on new complying loan terms. At this point, they will become 10-year loans.

Pre-1997 loans

A two-year grace period will also apply to these loans under the new arrangements. Therefore, a pre-1997 loan will be taken to be financial accommodation as at 30 June 2021. At this point, they will become 10-year loans.

Opportunities & Strategic options

Under the proposed transitional rules, currently unsecured 7-year loans will have an increased principal repayment initially and a higher interest rate. Essentially, this will mean an increased minimum repayment generally made as a franked dividend to directors who are also shareholders.

An opportunity exists for directors to turn these loans from unsecured to secured loans before 30 June 2019, as transitional rules are favourable. In order for this to happen, a written loan agreement must be put in place where the outstanding balances are secured against real property owned by the directors.

Also, no mortgage duty will be payable when the secured loan is registered as all states in Australia have abolished this in recent years. However, an additional cost of drawing up the secured loan agreement from a lawyer will be incurred.

A reduced minimum repayment under a secured loan may alleviate future interest on pre-1997 loans as additional room is available for repayments.

Information sourced using CCH iknow