Simplified rules for complying Division 7A loans

Currently, the rules allow Division 7A amounts to be converted into one of two types of loans.  The maximum term of the loans must not exceed:

  • Seven years for an unsecured loan; or
  • 25 years for a secured loan.

Following the implementation of the proposed amendments, a single loan model will apply, which will have the following features:

(a)  A maximum term of 10 years. As is current practice, the loan will effectively begin at the end of the income year in which the advance is made.

(b) The annual benchmark interest rate will be the Small business; Variable; Other; Overdraft Indicator Lending rate most recently published by the Reserve Bank of Australia prior to the start of each income year.

(c) No formal written loan agreement will be required. However, written or electronic evidence showing that the loan was entered into must exist by the lodgement day of the private company’s income tax return.  This evidence must show:

  • the parties to the loan;
  • the agreement that the loan be made, including details of the date and evidence of its execution and binding nature on the parties to the agreement; and
  • the loan terms (the amount of the loan, the date the loan was drawn, the requirement to repay the loan amount, the term of the loan and the interest rate payable).

(d) The minimum yearly repayment amount consists of both principal and interest:

  • The principal component is a series of equal annual payments over the term of the loan.