ATO Finalises TD 2025/5 – Division 7A Loan Repayments Clarified
- Alvin Fung
- Aug 29
- 4 min read
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The Australian Taxation Office (ATO) has finalised Taxation Determination TD 2025/5, confirming how Section 109R of the Income Tax Assessment Act 1936 (ITAA 1936) applies to Division 7A loan repayments, particularly where interposed entities are involved. The Determination provides clarity that, where repayments are funded—directly or indirectly—by the same private company, they are likely to be disregarded for Division 7A purposes, potentially resulting in deemed dividends.
Background
Division 7A is an integrity measure designed to prevent private companies from making tax-free distributions of profits to shareholders or their associates through loans, payments, or debt forgiveness. Section 109R—often called the anti-refinancing rule—operates to ensure that repayments of shareholder loans using funds sourced from the same private company do not reduce a Division 7A loan balance.
Prior to TD 2025/5, there was uncertainty around:
• Whether Section 109R extended to notional loans under Sections 109T and 109W (interposed entity rules); and
• Whether repayments routed through interposed entities could be disregarded.
The ATO has now confirmed that both actual and notional repayments can fall within Section 109R where, objectively, they are funded by the same private company.
Key Points from TD 2025/5
Application to Actual and Notional Repayments
Section 109R applies in two main circumstances:
- Pre-repayment borrowing – where an entity obtains a loan from the same company before making a repayment (109R(2)(b)); and
- Post-repayment borrowing – where, at the time of repayment, a reasonable person would conclude the entity intended to obtain a similar or larger loan from the same company (109R(2)(a)).
The Determination makes it clear that repayments of notional loans (under 109W(3))—arising where a private company lends via an interposed entity—are treated the same as actual repayments. If the funds used to make a repayment are ultimately sourced from the same private company, Section 109R is likely to disregard them.
Objective “Reasonable Person” Test
Section 109R applies based on objective circumstances, not subjective intent. Relevant factors include:
- Timing and amount of loans and repayments;
- Financial positions of the entities involved;
- Relationships between the parties.
Interaction with Interposed Entity Rules (Sections 109T & 109W)
Where a private company makes a loan via an interposed entity, Division 7A treats the company as having made a notional loan directly to the target entity. Repayments to the interposed entity are deemed repayments of the notional loan, which may be disregarded under Section 109R if effectively funded by the same company.
Minimum Yearly Repayments – Including Complying Loans
The ATO emphasises that borrowing from the same private company to meet minimum yearly repayment obligations—even under complying Division 7A loan agreements (Section 109N)—will not reduce the loan balance. Genuine external funding is required.
Alternative Views Considered and Rejected
The ATO considered arguments that:
- Notional loans should not be relevant to Section 109R; and
- Applying Section 109R to notional loans could lead to “double taxation.”
These views were rejected. The ATO considers this interpretation necessary to prevent circumvention of Division 7A, even if it results in multiple deemed dividends in some cases.
Anti-Avoidance and Date of Effect
- Part IVA (general anti-avoidance) may apply to circular or artificial funding arrangements.
- Date of effect: TD 2025/5 applies both before and after 20 August 2025, except where it conflicts with a pre-existing settlement agreed before that date.
Illustrative Examples from TD 2025/5
Example 1 – Pre-Repayment Borrowing via an Interposed Entity
Scenario:
- Banana Co (private company) lends $200,000 to Apple Trust (Loan A).
- Just before Banana Co’s lodgment day, Banana Co lends $205,000 to Orange Co (an interposed entity), which in turn lends the funds to Apple Trust.
- Apple Trust uses these funds to repay Loan A in full.
Outcome:
- Under Sections 109T and 109W, Banana Co is deemed to have made a notional loan of $205,000 to Apple Trust.
- As the repayment was objectively funded by Banana Co, Section 109R disregards the $200,000 repayment.
- Loan A is treated as unpaid, and a deemed dividend of $200,000 arises to the extent of Banana Co’s distributable surplus.
Example 2 – Post-Repayment Borrowing Directly from the Company
Scenario:
- Following Example 1, Apple Trust owes a notional loan of $205,000 to Banana Co.
- Before Banana Co’s next lodgment day, Apple Trust borrows $205,000 directly from Banana Co and uses it to repay Orange Co.
Outcome:
- The repayment to Orange Co is deemed a repayment of the notional loan to Banana Co.
- As this repayment was funded by Banana Co itself, Section 109R disregards it.
- The notional loan remains unpaid, and a deemed dividend arises up to Banana Co’s distributable surplus.
Implications for Private Companies
- Circular funding is ineffective: Repayments sourced—directly or indirectly—from the same private company are likely to be disregarded.
- Complying loans are not immune: Even loans on Section 109N terms require genuine external repayments.
- Documentation is critical: Companies should maintain robust evidence of funding sources.
- Expect ATO scrutiny: Review all Division 7A loan arrangements, particularly those involving interposed entities, and assess Part IVA risks.
Conclusion
TD 2025/5 confirms the ATO’s strict approach to Division 7A. By applying Section 109R to both actual and notional repayments—based on an objective test—it closes potential refinancing loopholes and underscores the importance of genuine external funding. Businesses should review their structures now to ensure compliance and avoid unintended deemed dividends.
Source:
TD 2025/5, ATO website.
