Introduction
On 19 February 2025, the Full Federal Court handed down a landmark decision that fundamentally reshaped the Division 7A landscape for private companies across Australia. Combined with new draft guidance from the ATO released just weeks later, this ruling means that business-as-usual is no longer an option for company directors and their advisors.
Division 7A of the Income Tax Assessment Act 1936 has always been one of the most complex and high-risk areas of Australian tax law. However, these 2025 updates introduce new risks and obligations that many company directors may not be aware of—particularly concerning common arrangements between private companies and associated trusts.
If you're a director of a private company, this comprehensive guide breaks down these critical changes, explains what they mean for your business, and provides a clear action plan to ensure you remain compliant while avoiding costly penalties that could reach into the hundreds of thousands of dollars.
What is Division 7A? (A Quick Refresher)
Before diving into the game-changing updates, let's establish the fundamentals that every private company director must understand.
Purpose: Division 7A is an integrity measure designed to prevent private company profits from being distributed tax-free to shareholders or their associates. Without it, business owners could simply take money from their company as a "loan" and never pay tax on it—effectively accessing company profits without the tax consequences of a proper dividend.
Core Concept: When a private company provides a financial benefit (such as a loan, payment, or forgiven debt) to a shareholder or their associate, and the arrangement doesn't meet specific legislative requirements, that benefit is treated as a "deemed dividend." This creates a significant tax problem because, unlike a normal dividend, it is unfranked—meaning it's fully taxable to the recipient at their marginal tax rate without the benefit of any company tax credits.
Who it affects: The rules apply to payments, loans, and debt forgiveness from a private company to:
- Shareholders of the company
- "Associates" of shareholders (broadly defined to include relatives, trusts where the shareholder is a beneficiary, and other related entities)
Understanding these basics is crucial because the 2025 updates significantly expand how these rules are interpreted and enforced.
The Game-Changer: The February 2025 Full Federal Court Decision
The Landmark Ruling on Division 7A and UPEs
The most significant development is the Full Federal Court's decision in Commissioner of Taxation v Bendel. This case has fundamentally altered how Division 7A applies to Unpaid Present Entitlements (UPEs)—a structure used by thousands of Australian family business groups.
What is a UPE? A UPE arises when a trust (often a family or discretionary trust) distributes income to a corporate beneficiary (a private company), but the cash is not physically paid to the company. Instead, the trust owes the company money, which appears as a receivable on the company's balance sheet and a liability on the trust's balance sheet. This arrangement is extremely common in family business structures.
The Court's Groundbreaking Finding The court ruled that when a private company has a UPE from a trust and consents to the trust continuing to use those funds for its own purposes, this arrangement constitutes a "loan" from the private company to the trust. Because the trust is typically an associate of the company's ultimate shareholders, this loan falls squarely within Division 7A's scope.
The Immediate Impact This ruling effectively closes what many considered a safe harbor. Countless informal arrangements where a company's trust entitlement remains unpaid while the trust continues using those funds are now at extremely high risk of being treated as Division 7A loans. Without proper management, these UPEs will trigger deemed dividends with potentially devastating tax consequences.
For context on how Division 7A can create unexpected tax liabilities through seemingly innocent arrangements, consider reading our analysis of Division 7A and third-party loan guarantees, which explores another area where business owners unknowingly breach tax law.
Decoding the ATO's New Guidance: TD 2025/D2
The ATO Responds: Understanding Draft Taxation Determination TD 2025/D2
Following the court's decision, the Australian Taxation Office moved with unprecedented speed. On 9 March 2025, it released Taxation Determination TD 2025/D2, providing crucial guidance on how it interprets the law in light of the Bendel decision.
What TD 2025/D2 Covers The determination focuses on section 109R, which provides an exception for payments that are otherwise assessable to the recipient. More importantly, it signals the ATO's intensified scrutiny of loan mechanics and repayment arrangements under Division 7A.
Critical Focus on Payments and Repayments The new guidance reinforces that the ATO will not accept superficial compliance. Key points include:
- Journal entries alone are insufficient: Simply making accounting entries to offset loans doesn't constitute a valid repayment
- Genuine cash transactions required: A repayment must involve actual money changing hands
- Documentation is paramount: Every transaction must be properly documented with clear evidence of the payment
Practical Example That Could Cost You Thousands Consider this common scenario: A director uses their company credit card for a personal holiday costing $15,000. The company pays the credit card bill, creating a Division 7A issue. To avoid a deemed dividend, the director must either:
- Repay the $15,000 to the company in cash before the company's tax return lodgment day; or
- Enter into a formal Division 7A loan agreement with proper terms, interest rates, and repayment schedules
TD 2025/D2 makes it crystal clear that option 1 requires a genuine cash transaction—not just an accounting entry offsetting the director's loan account against a salary bonus or dividend entitlement.
What This Means for Your Business Companies must now maintain even more rigorous standards for tracking, documenting, and managing all payments to shareholders and associates. The ATO's tolerance for ambiguous or informal arrangements has effectively disappeared.
The ATO's 2025 Hit List: Common Division 7A Misconceptions to Avoid
Are You Making These Costly Mistakes?
The recent updates highlight several dangerous misconceptions that the ATO will aggressively target in 2025. Many of these mistakes can result in significant unexpected tax bills.
Misconception 1: "A UPE isn't a loan"
- Reality: Post-Bendel, this assumption is extremely dangerous. If your company is entitled to money from an associated trust and that money remains with the trust, the ATO will almost certainly treat this as a Division 7A loan requiring formal documentation and compliance.
Misconception 2: "Informal or 'at-call' loans are acceptable"
- Reality: All loans must have a written Division 7A loan agreement established before the company's tax return lodgment day. This agreement must specify:
- Maximum term (7 years for unsecured loans, 25 years for secured loans)
- Minimum interest rate (8.37% for the 2025-26 income year)
- Annual minimum repayment requirements
Misconception 3: "We can just repay it before lodging the tax return"
- Reality: While repayment remains an option, TD 2025/D2 makes the rules stricter. The repayment must be a genuine cash transaction. Additionally, you cannot repay a loan just before year-end and then re-borrow the same amount shortly after—the ATO will treat this as a sham arrangement.
Misconception 4: "My accountant handles everything, so I don't need to worry"
- Reality: While professional advice is crucial, directors remain personally liable for their company's tax compliance. You must understand these risks and ensure you provide complete, accurate information about all transactions between the company and shareholders or associates.
For broader context on how the ATO is intensifying its focus on small business compliance, see our comprehensive guide to the ATO's 2025 small business crackdown.
Your 2025 Division 7A Action Plan: A Compliance Checklist
Immediate Steps to Protect Your Company
Given these fundamental changes, passive compliance is no longer sufficient. Here's your essential action checklist:
[ ] Conduct an Urgent Balance Sheet Review Work with your tax advisor to identify every loan, advance, and payment made to shareholders, directors, and their associates. Pay particular attention to:
- Any "loan to beneficiary" accounts
- Receivables from associated trusts
- Director loan accounts with debit balances
- Unpaid present entitlements
[ ] Assess All UPEs Immediately In light of the Bendel decision, review every UPE owed to your company from associated trusts. Determine whether these now constitute Division 7A loans and develop an immediate action plan for each one.
[ ] Formalize All Loan Agreements Ensure every loan has a written agreement meeting Division 7A requirements:
- Correct interest rate and loan term
- Schedule of minimum annual repayments
- Proper security documentation (if applicable)
- Signed agreements before the lodgment day
[ ] Implement Rigorous Documentation Systems Establish comprehensive record-keeping for:
- All loan agreements and amendments
- Evidence of genuine cash payments and repayments
- Purpose and business justification for all transactions
- Board resolutions approving significant arrangements
[ ] Prepare for Your 2025 Company Tax Return Don't wait until after 30 June. Schedule discussions with your tax advisor now to:
- Make necessary structural adjustments
- Establish complying loan agreements
- Complete required repayments before lodgment day
- Review and update your compliance procedures
[ ] Schedule Professional Consultation The complexity of these changes cannot be overstated. Book a comprehensive review with a qualified tax professional who understands the latest Division 7A developments.
For additional guidance on maintaining tax compliance across your business operations, consider reviewing our Australian small business tax guide for comprehensive coverage of rates, deductions, and key deadlines.
Conclusion
The events of 2025—particularly the Full Federal Court's landmark Bendel decision and the ATO's swift response through TD 2025/D2—represent the most significant shift in Division 7A enforcement in decades.
The message from both the courts and the ATO is unmistakable: the era of informal arrangements and technical compliance is over. The ATO is signaling an aggressive crackdown on arrangements it views as non-compliant, particularly involving private companies and associated trusts.
The cost of inaction is substantial. Deemed dividends can result in tax bills reaching hundreds of thousands of dollars, often with little warning. Directors who fail to understand and manage these risks face personal liability that could threaten both business and personal assets.
Proactive management is now absolutely essential. The complexity of these updates, combined with their far-reaching implications, makes professional guidance not just advisable but critical for protecting your financial interests.
Don't wait for the ATO to raise questions about your arrangements. The time for action is now—schedule a comprehensive Division 7A review with your tax advisor today and ensure your business is positioned for compliance in this new regulatory environment.
