Division 7A Compliance 2025-26: Looped Loans, Trust Risks & ATO Focus
Division 7A has always been a challenging area for business owners and private groups, but as we move through 2025 and into 2026, the risks are rising. With benchmark interest rates remaining elevated, new court rulings shifting established ATO views, and a specific regulatory crackdown on “looped loans,” the rules are becoming more complex.
For many directors and shareholders, this means greater cash-flow pressure and an increased chance of unexpected tax consequences. Understanding the basics of complying Division 7A loan agreements is no longer enough; you must be aware of how the ATO is scrutinizing repayment behaviors.
Higher Rates, Bigger Risks
The benchmark interest rate for the year ended 30 June 2025 sits at 8.77%. For businesses with existing loans, this translates into significantly higher minimum yearly repayments (MYRs).
Where funds haven’t been used for income-producing purposes, the deductibility of interest may also be at risk. Together, these factors place pressure on cash flow. If your company’s cash flow is tight, now is the time to review tax-effective ways to withdraw funds rather than defaulting on loan obligations, which can trigger deemed dividends.
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 (UPE) 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 or Section 100A risks.
Repayments Under Scrutiny: The Rise of “Looped Loans”
Alongside the uncertainty around trusts, the ATO has sharpened its focus on how loans are repaid. Specifically, they are targeting “Looped Loans” (often referred to as circular or round-tripped repayments).
This occurs when a shareholder uses funds from the private company (or an associate) to repay a loan to that same company. Under Section 109R, the Commissioner can disregard these repayments if they are not genuine.
Key Triggers for Tax Trouble:
- ✓
The Reasonable Person Test: If a reasonable person would conclude that a loan was made solely to allow the borrower to make a repayment on an existing Division 7A loan, the repayment may be ignored for tax purposes. - ✓
Interposed Entities: The ATO is applying stricter tracing rules (referencing TD 2025/D2) to identify arrangements where funds flow through multiple entities to obscure the “loop.” - ✓
Short-term Movements: Relying on money flowing back into the company just before 30 June, only to be drawn out again shortly after, is a significant red flag.
Is All Refinancing Banned?
Not necessarily. The legislation (specifically s109R(5), (6) & (7)) does provide for certain strategies involving refinancing. However, specific criteria must be met to ensure these are complying loan arrangements and not treated as a disregardable repayment.
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.
A common 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.
Directors’ Responsibilities
All of this underscores the need for governance. Shareholder drawings, loan agreements, and trust distributions should be monitored throughout the year—not just at year-end.
Failure to manage these tax obligations can lead to severe personal consequences, including Director Penalty Notices (DPNs). If the company cannot pay its tax liabilities arising from these issues, the ATO can pursue directors personally for the debt.
Act Now to Protect Your Position
Division 7A is shifting quickly: higher interest rates, unresolved High Court litigation, and stricter ATO oversight on looped loans mean the risks for businesses are real.
If you have loans, unpaid present entitlements, or are considering refinancing a shareholder loan, now is the time to act.
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NEED HELP? This article provides general information and should not be considered legal or tax advice. For personalised guidance, please contact our expert team of tax accountants at The Quinn Group by calling 1300 QUINNS (1300 784 667) or +61 2 9223 9166, or submit an online enquiry form to arrange an appointment.
