Division 7A Loans and TD 2025/6: What Business Owners Need to Know

The Australian Taxation Office (ATO) has released Taxation Determination TD 2025/6, which directly affects Division 7A loans, interposed entity arrangements, and loan guarantees. With retrospective effect, this ruling expands how section 109U of the Income Tax Assessment Act 1936 (ITAA 1936) applies. Business owners, company directors, and accountants need to understand TD 2025/6 compliance to avoid costly Division 7A loan breaches and unexpected tax liabilities.

What Is Division 7A?

Division 7A is an anti-avoidance provision designed to prevent private company owners and their associates from accessing company profits without paying the correct tax. Division 7A loans generally arise when a private company provides loans to shareholders or their associates, makes payments to shareholders, or forgives debts owed by shareholders or associates. If a Division 7A loan occurs, the benefit may be treated as an unfranked dividend, creating additional tax obligations.

How Section 109U Applies to Interposed Entity Arrangements

Section 109U specifically targets interposed entity arrangements. An interposed entity is another entity, such as a company, trust, or partnership, positioned between the private company and the shareholder. TD 2025/6 clarifies that s.109U is not limited to company-to-company guarantees. It applies whenever an interposed entity is involved in a loan or guarantee arrangement, and a shareholder or associate ultimately receives a benefit. Understanding this is critical for maintaining compliance with Division 7A loans and avoiding retrospective ATO adjustments.

ATO Compliance Focus on High-Risk Arrangements

The ATO has stated that it will focus on high-risk Division 7A arrangements that appear artificial or contrived. Common red flags include interposed entity structures used to bypass Division 7A rules, private companies with no distributable surplus, or guarantees structured to avoid tax obligations. TD 2025/6 reinforces the compliance approach highlighted in Taxpayer Alert TA 2024/2, which warns against arrangements designed to exploit gaps in Division 7A legislation.

Implications of TD 2025/6 for Business Owners

TD 2025/6 applies retrospectively, meaning both current and past Division 7A loan arrangements could be affected. Business owners and accountants should review all interposed entity arrangements, guarantees, and loans to ensure compliance. Genuine commercial purpose and proper documentation are essential to demonstrate that arrangements are not artificially designed to circumvent Division 7A rules. Failure to address non-compliant structures may result in deemed dividends, additional tax liabilities, and potential penalties.

Strengthened Division 7A Loan Compliance

TD 2025/6 broadens the ATO’s interpretation of Division 7A loans and interposed entity arrangements. Business owners, company directors, and trustees should carefully review existing loan and guarantee structures. Ensuring that interposed entities are used legitimately and that loans do not create unintended Division 7A consequences is crucial for avoiding retrospective compliance issues and ATO penalties.

Need Expert Advice on Division 7A Loans?

At Gavin Ma & Co, we specialise in Division 7A compliance, TD 2025/6 guidance, and interposed entity arrangements. Whether you need help reviewing existing Division 7A loans, restructuring guarantees, or ensuring TD 2025/6 compliance, our team provides practical advice to protect your business and minimise tax risks. Contact Gavin Ma & Co today for expert support on Division 7A loans and interposed entity compliance.