Division 7A has always been a challenging area for business owners and private groups, but in 2025 the risks are rising. With benchmark interest rates remaining elevated, new court rulings shifting established ATO views, and the regulator focusing on repayment integrity, the rules are becoming more complex and the stakes higher. For many, this means greater cash-flow pressure, ongoing uncertainty, and an increased chance of unexpected tax consequences.
Higher rates, bigger risks
The benchmark interest rate for the year ended 30 June 2025 sits at 8.77%. For businesses with complying Division 7A loans, this translates into significantly higher minimum yearly repayments. Where funds haven’t been used for income-producing purposes, deductibility of interest may also be at risk. Together, these factors place pressure on cash flow and raise the possibility of deemed dividends if obligations are not met. This is why proactive planning and documentation are critical.
The trust question
At the same time, Division 7A continues to evolve in the courts. Earlier this year, the Federal Court ruled that an unpaid present entitlement from a trust to a private company is not automatically a Division 7A loan. While this eased immediate pressure on many family groups, the Commissioner has appealed to the High Court, leaving the position uncertain. Until a final outcome is known, trust distributions must be managed carefully to avoid being caught by changing interpretations.
Repayments under scrutiny
Alongside the uncertainty around trusts, the ATO has sharpened its focus on repayments. Section 109R allows the Commissioner to disregard “circular” or “round-tripped” repayments—where money flows back into the company soon after it is drawn out. Relying on short-term movements around 30 June can therefore backfire. Businesses now need clear evidence that repayments are genuine, funded independently, and reduce the debt in a commercial way.
Timeframes and old exposures
Another misconception is that older Division 7A issues are automatically “out of time.” From 1 July 2024, the amendment period for many small and medium businesses was extended to four years—and in cases of fraud or evasion, there is no time limit at all. This means even historical arrangements may still be exposed. Businesses should not assume problems are behind them without a thorough review.
Restructuring and remedies
Some business owners may consider restructuring as a solution, but this is not a shortcut. Unless restructuring is driven by genuine commercial objectives, the ATO can apply integrity rules—including Part IVA—to unwind the benefits. Similarly, while the Commissioner may exercise discretion where breaches arise from honest mistakes, relief is not automatic. Prompt action, clear evidence, and a credible rectification plan are required.
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Directors’ responsibilities
All of this underscores the need for directors to stay on top of governance. Shareholder drawings, loan agreements, and trust distributions should be monitored and documented throughout the year—not just at year-end. For advisers onboarding clients, Division 7A issues must be identified and addressed early to ensure professional obligations are met and risks are contained.
Act now to protect your position
Division 7A is shifting quickly: higher interest rates, unresolved High Court litigation, and stricter ATO oversight mean the risks for businesses are real and evolving. If you have loans, unpaid present entitlements, or older arrangements within your group, now is the time to act.
