Solving Division 7A Interest Rate Doom

Taxation & Revenue

minutes reading time

DATE PUBLISHED: February 5, 2024

key takeaways

  • On 1 July 2024, the Division 7A interest rate almost doubled to 8.27%
  • Clients should review their structure and consider restructuring or refinancing options to alleviate the increased Division 7A minimum yearly repayment burdens
  • Obtaining advice early is essential to ensure continued compliance with the Division 7A regime

2023-2024 Interest Rate

From 1 July 2023, the benchmark interest rate for complying division 7A loans has skyrocketed from 4.77% to 8.77%. This is almost a double increase from the rate last year and is the highest benchmark interest rate we have seen since 1 July 2009.

While the Division 7A interest rate has held relatively steady for three years now, clients are about to feel increased repayment pain given the steep hike to their minimum yearly repayment obligations. If the benchmark interest rate continues increasing, these repayments may become unmanageable for clients and their businesses.

For example, a client with a $750,000 Division 7A loan would see an overall increase in their minimum yearly repayment from the previous year’s rates of $26,250.

These increased repayments should be front-of-mind for SME advisers and their clients to tackle well ahead of 30 June.

The good news is that a range of options exist for managing clients’ 2024 Division 7A repayment burdens.

Business Trusts

Historically, businesses that operate through a trust structure have made distributions to corporate beneficiaries to take advantage of the 25% small business company tax rate, sometimes referred to as a bucket company.

With the increasing benchmark interest rate and the potential uncertainty of further increases, the cost of keeping tax below 25% and allowing the effective retention and redeployment of funds in the business may become burdensome on businesses operated through trust structures.

There are many options available to effectively restructure businesses operated through trusts. Restructuring a business from a trust to a company can achieve a range of objectives, including:

  • Repayment of existing Division 7A loans
  • Alleviation of future Division 7A repayment obligations
  • Corporatisation of business operations to allow profit retention and direct access to the 25% tax rate
  • Management of business succession elements and business expansion plans
  • Elimination of taxation and duty consequences of restructuring


The Taxation and Revenue team is well placed to consider and implement a number of restructuring measure to move business operations from a trust to a company without tax and duty consequences (depending on the state and territory of the client) to obtain the benefits above.

Investment Trusts

Trusts are often used as a vehicle to hold passive investments (real property and shares). Similar to business trusts, funds are distributed to a bucket company in order to access the corporate tax rate and minimise the tax burden of a group.

Division 7A issues often arise due to the disparity between taxable income and actual cash available to distribute. Alternatively, trading companies have been used to fund passive investments. Quite often, investment trusts routinely rack-up Division 7A debts. Our Taxation & Revenue team can assist with the development and implementation of a range of novel solutions for mitigating these Division 7A sleeper issues in private investment holdings.

Solutions for this ongoing issue may include:

  • Asset transfers & cloning to repay Division 7A debts
  • Rollovers to achieve corporatisation of investment assets
  • Partial corporatisation of investment structures to discharge loan balances


Other Considerations 

Outside of restructuring to a corporate environment, advisors and clients could consider refinancing any 7-year division 7A complying loans to 25-year loans, where sufficient equity exists in the group there is an ability to register a mortgage over real property.

An important and overlooked component of securing the obligations under Division 7A is that the loan can actually be guaranteed by someone other than the borrower.

If you think this may be an option, please contact our Taxation and Revenue team to discuss whether this may be a viable option to decrease the minimum yearly repayments associated with Division 7A debts.

Conclusion

Clients operating their business through a trust or holding their assets in a trust should consider the options available to restructure to eliminate or reduce the burden of the Division 7A interest rate hike. Obtaining advice is essential when considering restructuring to ensure that no adverse tax consequences are triggered.

Should restructuring a business be an unpalatable solution, consideration should be given to whether there is the ability to refinance 7-year loans to 25-year secured Division 7A complying loans.

By speaking with our Taxation & Revenue team early, the Division 7A interest doom can be mitigated and managed well before 30 June 2024! 

how can mcw help?

If you want to explore these options further and help your client avoid Division 7A doom, book in a consultation with one of our Tax & Revenue specialist lawyers today.

GET IN TOUCH WITH US!

Don't Miss a Beat

Subscribe to MCW Insights

Still Have Questions?

Make an Enquiry

Is it Time for a Company Structure?
Solving Division 7A Interest Rate Doom
Navigating Property Acquisition through Self-Managed Superannuation Funds
Significant NSW Duty Amendments in the Budget to Broaden the Duty Regime
Transferring Shares, Cancelling Shares or Varying Shares? Landholder Duty, Corporate Trustee Duty and Other Risks for your Firm to Manage
Capital Raising Transactions – New Focus On Landholder Duty for Property Funds and Share Transactions
Incoming pain for athletes, celebrities and entertainers – the ATO issues its determination on the “Fame Tax”
Medical Centre Payroll Amnesty: QRO Guidelines & Updates