ATO Benchmark Interest Rate for Division 7A loans for Year Ending 30 June 2019
The ATO has advised that it intends to issue the following guidance on 25 July 2018:
Taxation Determination TD 2018/14 Income tax: what is the benchmark interest rate applicable for the year of income that commenced on 1 July 2018 for the purposes of Division 7A of Part III of the Income Tax Assessment Act 1936 and how is it used?
The determination advises that the benchmark interest rate for 2018/19 for the purposes of s 109N and 109E of the ITAA 1936 is 5.20% pa.
If you have questions on any of the above issues raised, please do not hesitate to contact us.
Judy She
Senior Accountant
T: 02 9984 7774
E: judys@northadvisory.com.au
Martin van der Saag
Partner
T: 02 9984 7774
E: martinv@northadvisory.com.au
About the author
Marius Fourie - Director & Business Advisor
As Director and Business Advisor, Marius uses his accounting expertise and empathetic skills to work directly with business owners and help them feel at ease with their finances.
Marius saw a common need in clients that just wasn’t being met by accounting providers.
That need was for clear, open communication and streamlined accounting services that didn’t come padded out with any unnecessary features.
Business owners just don’t have time to compare different accounting firms to see which one has the best packages with the best inclusions (many of which they would pay for but never use).
Key Takeaways
For 2018/19, the Division 7A benchmark rate is 5.20% p.a. —
this is the interest rate private companies must at least match when making loans to shareholders or associates to avoid deemed dividends.
Benchmarked-rate compliance is critical — under-charging interest risks the loan being taxed as a dividend.
If rate, terms or repayments don’t comply, the loan may be deemed an unfranked dividend under Division 7A.
Charging more than the benchmark is allowed — and sometimes beneficial.
Using a higher interest rate still satisfies Division 7A requirements and may help manage compliance and repayment obligations.
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Frequently Asked Questions
What is the “benchmark interest rate” under Division 7A of the ITAA 1936?
It is the “Indicator Lending Rates – Bank variable housing loans (owner-occupied)” rate as published by the Reserve Bank of Australia (RBA) immediately before the start of the income year — used to test loans between private companies and their shareholders/associates for Division 7A purposes.
What was the benchmark interest rate for the 2018/19 income year (year ending 30 June 2019)?
For 2018/19, the benchmark interest rate was set at 5.20% p.a. for Division 7A loan-interest calculations.
Why does the rate matter — what happens if a loan uses a lower interest rate?
If a loan to a shareholder or associate is at a rate below the benchmark — or if the loan fails other Division 7A compliance rules — the loan can be treated as a deemed unfranked dividend. That means it becomes assessable income for the recipient, potentially taxed at their full marginal rate.
Can a private company charge more than the benchmark interest rate, and will that still be acceptable under Division 7A?
Yes — charging a rate equal to or higher than the benchmark is permissible, and having a higher rate does not disqualify the loan. The loan can still be a complying loan, as long as other requirements (written agreement, maximum term, repayments) are met.
What other conditions must be met for a loan to avoid being deemed a dividend under Division 7A (besides using the benchmark rate)?
To qualify as a complying Division 7A loan, the arrangement must be documented in writing before the company’s lodgment date, set out a maximum term of either seven years for an unsecured loan or twenty-five years for a loan secured over real property, and ensure that minimum yearly repayments — covering both principal and interest — are made on time in accordance with the Division 7A rules.
What was the ATO benchmark interest rate for Division 7A loans for the year ending 30 June 2019?
The ATO benchmark interest rate for Division 7A loans for the year ending 30 June 2019 was set at 8.20%. This rate is used to determine minimum interest that must be charged on loans from private companies to shareholders or their associates to avoid a deemed unfranked dividend.
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