Got a Division 7A loan that’s putting pressure on your cash flow? You’re not alone. For many businesses, the standard 7-year term can mean sizeable minimum yearly loan repayments that need to be made by 30 June each year.
The good news? If you (or a related entity) own property with enough equity, you may be able to stretch that loan out to 25 years. Here’s how it works, and what to watch out for.
What is a Division 7A Loan?
When a private company lends money to a shareholder (or their associate, like a family trust), Division 7A can treat that loan as an unfranked dividend. That’s usually a nasty tax outcome.
To avoid it, the loan needs to be put under a complying loan agreement before the company’s lodgment day. That means the agreement must:
- Be in writing
- Charge interest at or above the ATO’s benchmark rate (8.77% for the 2027 income year)
- Not exceed the maximum term
The maximum term is 7 years for an unsecured loan. But it’s 25 years if the loan is secured by a registered mortgage over real property and meets a 110% equity test.
Why secure your Division 7A Loan?
1. Much smaller Division 7A minimum repayments
This is the big one. Let’s say you have a $1 million loan with 5 years left to run. At the current benchmark interest rate, your minimum yearly repayment is around $255,000.
Secure that same loan so it has 23 years left, and the minimum repayment drops to around $103,000. That’s more than $150,000 a year back in your pocket (or your business).
2. You can convert existing loans
You don’t need to start from scratch. The law lets you convert an existing unsecured loan into a secured one and extend the term. The catch? The new maximum term is 25 years less the time that’s already passed. So the earlier you do it, the more runway you get.
3. The property doesn’t have to be yours
The borrower doesn’t need to own the property. A related entity (like a family trust that owns the family home or an investment property) can provide third-party security. With the right documents, this can unlock equity that’s sitting elsewhere in your group.
The two tests you need to pass
To get the 25-year term, the loan must satisfy both of these:
- 100% of the loan must be secured by a mortgage over real property that’s registered under State or Territory law.
- The 110% equity test: When the loan is made or converted to a secured loan, the property’s market value (less any liabilities secured over the property in priority to the loan) must be at least 110% of the loan amount.
Sounds simple. In practice, this is where most of the traps hide.
Tips, tricks and traps
1. Registered means registered
A signed mortgage deed sitting in a drawer won’t cut it. Neither will a caveat. The mortgage needs to be lodged and registered at the titles office. Until that happens, you’re still on the 7-year clock.
2. Don’t forget to vary the loan agreement
The mortgage secures the loan, but it doesn’t automatically change the loan’s term. You also need a written variation of the existing loan agreement that extends the maximum term and recalculates your repayments. We see this missed more often than you’d think.
3. Do the 110% maths properly
Deduct everything that ranks ahead of your loan. That includes the bank’s first mortgage (and ideally the full facility limit, not just today’s balance, if there’s a redraw available). Also check whether the property is cross-collateralised with other bank debt. If it is, your available equity could be much lower than it looks.
4. Multiple loans on one property? Priority matters
If two companies are both lending to your trust and securing over the same property, the second lender has to deduct the first lender’s loan in its 110% test. A deed of priority sets the ranking in stone. Without one, your maths (and your 25-year term) could fall over.
5. Get solid valuation evidence
A quick agent appraisal might get you started, but it usually comes with disclaimers saying it can’t be relied on. If your numbers are tight, get a formal valuation. And if the appraisal gives a range, use the bottom end.
6. Know when your loan was really made
The 25-year clock starts from when the loan was first made, not when you signed the loan agreement. These dates can be months apart. Get your accountant to confirm the actual dates so the maturity date in your documents is right.
7. Keep the secured amount tight
Draft the mortgage so it secures the specific Division 7A loans you’re extending, not every future advance under the agreement. Otherwise, a new loan down the track could eat into your equity buffer.
8. Check the trust deed
If a trust is providing the security, make sure its trust deed actually lets the trustee mortgage trust property for someone else’s debt. Some deeds also need a guardian or appointor to sign off. And every company involved will need board resolutions.
9. Talk to the bank early
Most bank loan agreements don’t let you put a second mortgage on the property without consent. Get the bank on board before you lodge anything. Breaching your bank’s covenants to fix a tax problem isn’t a great trade.
10. Repayments still matter
A longer term gives you breathing room, but you still need to make your minimum yearly repayment (plus benchmark interest) by 30 June every year. Any shortfall may be treated as an unfranked dividend.
And watch where the money for those repayments comes from. If you repay the loan with money borrowed back from the same company, or plan to reborrow a similar (or larger) amount straight after, the ATO can ignore the repayment altogether. Going around in circles doesn’t count.
Is it right for you?
Securing a Division 7A loan works best when:
- The loan is large and the 7-year repayments are hurting cash flow
- There’s property in the group with plenty of spare equity
- You’re early enough in the loan’s life to gain a meaningful extension
But it’s not a free fix. Valuations, legal documents and registration fees all add up, so make sure the numbers stack up first. How much equity do you really have? Will the bank sign off? And how long is the loan likely to hang around? If the savings don’t outweigh the set-up costs, it’s probably not worth doing.
Get advice on securing your Division 7A Loan
Getting this right needs tax and legal to work hand in hand. BlueRock’s accounting and law teams can crunch the numbers, check your structure and prepare the variations, mortgages and priority deeds so your loans stay compliant. Get in touch for a straight-talking chat about whether it makes sense for you.
Disclaimer: The material contained in this publication is meant to be informational only and is not to be construed as legal or tax advice. BlueRock will not be held liable or responsible for any claim which is made as a result of any person relying upon the information contained in this publication.
