Division 7A loans in 2026–27: the 8.77% benchmark rate, minimum repayments and the Bendel change

When Division 7A applies to a loan

Division 7A of the Income Tax Assessment Act 1936 treats money a private company pays, lends or forgives to a shareholder, or an associate of a shareholder, as an unfranked dividend unless an exception applies. For a loan, the exception most practices rely on is to repay it, or put it on complying terms, by the company’s lodgment day for the income year it was made.

Lodgment day is the earlier of the date the company’s return for that year is due and the date it’s actually lodged. That date, not 30 June, is the first deadline that matters.

The Division 7A benchmark interest rate for 2026–27 is 8.77%

The benchmark rate is the RBA’s indicator lending rate for standard variable owner-occupier housing loans from banks, as last published before the income year starts. It’s not a business overdraft rate. A company with a substituted accounting period uses the rate published before its own year starts.

What makes a Division 7A loan agreement complying

Section 109N sets three conditions, and all of them must be met before lodgment day for the year the loan is made:

• The agreement is in writing. There’s no prescribed form, but the ATO expects it to name the parties, the amount, the term, the repayment obligation and the interest rate, and to be signed and dated.
• Interest for each later year is at least that year’s benchmark rate.
• The term is no longer than the maximum. That’s 7 years for an unsecured loan. It’s 25 years if the whole loan is secured by a registered mortgage over real property whose market value, less any prior-ranking debts, is at least 110% of the loan when it’s made.

One written agreement can cover loans made later, which is how most firms handle a shareholder who draws on the company through the year.

How to calculate the minimum yearly repayment

The formula in section 109E(6) is a standard annuity repayment on what’s left of the loan:

No minimum repayment or interest is due in the year the loan is made. For the worked example below, here’s the 2026–27 calculation on an opening balance of $70,072.52 with two years left:

1. 01

   Multiply the balance by the rate.

   $70,072.52 × 8.77% = $6,145.36.

2. 02

   Work out the discount factor.

   1 ÷ 1.0877 = 0.91937115, raised to the power of 2 = 0.84524331.

3. 03

   Subtract it from one.

   1 − 0.84524331 = 0.15475669.

4. 04

   Divide.

   $6,145.36 ÷ 0.15475669 = $39,709.82, due by 30 June 2027.

A worked example: a seven-year loan with one shortfall

Bull Antics Pty Ltd lent its shareholder Ryan Bull $180,000 in 2020–21 under a seven-year unsecured complying agreement. Ryan repays on 30 June each year, usually the minimum rounded up to the next $100. In 2024–25 he paid $20,000 instead.

The $14,195.28 Ryan didn’t pay is a deemed dividend in 2024–25, capped by the company’s distributable surplus. The loan also carries on, with a higher balance spread over fewer years, so the 2025–26 minimum jumps to $39,496.14.

The deemed dividend doesn’t reduce the loan. Ryan still owes the full balance, which is why a shortfall costs twice: tax on the dividend now, and bigger repayments later.

Repayments that count, and ones that don’t

The ATO looks at how a repayment was funded and evidenced, not only at the amount. Section 109R disregards some repayments entirely.

Unpaid trust entitlements after the Bendel decision

On 10 June 2026 the High Court decided Commissioner of Taxation v Bendel against the ATO. A private company beneficiary that does nothing about its unpaid present entitlement from a trust isn’t making a loan to the trust for Division 7A purposes.

The ATO’s decision impact statement of 26 June 2026 says what follows:

• TD 2022/11, which treated those entitlements as loans from 1 July 2022, will be withdrawn. At 1 October 2026 the ATO lists it as being reviewed.
• Passive unpaid entitlements, including those held on sub-trust arrangements, aren’t loans.
• Entitlements already put on complying loan terms remain loans, even if that was done on the old view of the law.
• Section 100A and Subdivision EA can still apply, so a trust distribution to a company still needs reviewing.
• Taxpayers who treated a passive entitlement as a loan can ask for an amendment or lodge an objection.

The Division 7A reforms are still not law

In 2018 Treasury consulted on replacing the 7- and 25-year terms with a single 10-year loan, using a business overdraft rate and dropping the written agreement. None of it has been legislated.

The Act as compiled on 1 July 2026 still has the 7- and 25-year terms and the housing-loan rate, and none of the 2026 tax amendment Acts change Division 7A. Treat any calculator or article built on the 10-year model as wrong.

A year-end checklist for every Division 7A loan

1. 01

   Load the new benchmark rate on 1 July.

   8.77% for 2026–27. Check every schedule uses it, not last year’s.

2. 02

   Work out each loan’s minimum before May.

   Give the shareholder time to fund it. A shortfall found in July can’t be fixed for the year just ended.

3. 03

   Confirm how it will be paid.

   Cash with a bank record, or a set-off agreement in place by 30 June. We’d suggest putting the set-off in writing.

4. 04

   Check new loans have an agreement before lodgment day.

   Drawings that are neither repaid nor covered by a complying agreement by lodgment day are a deemed dividend.

5. 05

   Post the interest.

   Journal the year’s interest in the company’s file so the loan account matches the schedule.

6. 06

   Record any shortfall.

   Calculate the deemed dividend, consider the distributable surplus cap, and keep the working with the file.

How AccountKit keeps Division 7A schedules current

AccountKit’s Division 7A tool holds every loan in a client group in one place. You set each loan up once; AccountKit applies the benchmark rate each year, calculates the interest and the minimum yearly repayment, and forecasts the repayments ahead for dividend planning. The dividend and interest journals post straight to the company’s Xero file, so the loan account and the schedule agree. The tool is included in the base AccountKit subscription; pricing lists the plans.

If the company also lends between entities in the group, our guide to reconciling inter-entity loans in Xero covers the other half of the job.