A section 109N complying loan agreement keeps a private company loan outside the deemed dividend rules. Three conditions apply: a written agreement, the benchmark interest rate, and a capped term. The Division 7A benchmark interest rate for 2026-27 is 8.77 per cent, up from 8.37 per cent.
The High Court held in Bendel that an unpaid present entitlement is not, of itself, a Division 7A loan. The ATO Decision Impact Statement accepts the decision and withdraws Taxation Determination TD 2022/11. Existing complying loan agreements remain loans in fact, and repayments continue. Past assessments built on the old view are correctable through amendment or objection in defined cases.
What Is a Section 109N Complying Loan Agreement?
A section 109N complying loan agreement is a written loan that meets three conditions and stops a company loan from becoming a deemed dividend. Division 7A treats loans from private companies to shareholders or their associates as unfranked dividends unless an exception applies. Section 109N supplies the main exception. The three conditions are set out below:
- Written agreement: the loan terms are in writing before the lodgement day of the company’s tax return for the year the loan is made.
- Interest rate: the rate for each year equals or exceeds the Division 7A benchmark interest rate.
- Maximum term: 7 years for an unsecured loan, or 25 years where the loan is fully secured by a registered mortgage over real property.
A loan meeting all three conditions escapes the deemed dividend in the year of the loan. Minimum yearly repayments then keep the loan compliant across its term. One missed condition at the start, or one missed repayment later, converts the shortfall into an unfranked dividend in the shareholder’s assessable income.
What Is the Division 7A Benchmark Interest Rate for 2026-27?
The Division 7A benchmark interest rate for the 2026-27 income year is 8.77 per cent. The rate rose from 8.37 per cent in 2025-26 and matches the 8.77 per cent rate of 2024-25. Every complying loan agreement prices each year at the current benchmark or above. The rise flows directly into minimum yearly repayments from 1 July 2026.
The minimum yearly repayment amortises the loan’s opening balance over the remaining term at the benchmark rate. Payment of principal and interest falls due by 30 June each year. A shortfall against the minimum becomes an unfranked deemed dividend for the shortfall amount.
Charging below the benchmark rate produces the same result. We recalculate every client loan schedule in July, because a rate rise lifts the June payment months before anyone thinks about year-end.
What Did the Bendel Decision Change for Division 7A?
The High Court held that an unpaid present entitlement is not, of itself, a Division 7A loan. Commissioner of Taxation v Bendel [2026] HCA 18 settled the question. The 5-2 majority decision of 10 June 2026 rejected the position the ATO had maintained since 2009.
A trust distribution owed to a corporate beneficiary, left uncalled, involves no transfer of value with an obligation of repayment. Mere inaction by the company provides no financial accommodation.
The decision carried conditions. The reasoning turned on the trust deed and resolutions in Bendel, where distributed amounts were set aside on separate trust. Deeds and resolutions drafted differently need their own analysis. The decision answered one question: a UPE alone is not a loan. Everything the parties do after the entitlement arises still matters.
What Does the ATO Decision Impact Statement Say?
The ATO Decision Impact Statement accepts Bendel and confirms that a company’s mere failure to demand payment is not financial accommodation. The statement, summarised across the profession in mid 2026, resets the administrative position. The key confirmations are listed below:
- Taxation Determination TD 2022/11, which stated the contrary view, is being withdrawn.
- A plain UPE, including one set aside on a separate trust, is not a section 109D loan without more.
- The character of each arrangement still depends on the trust deed, the distribution resolutions, the accounts, and later conduct.
- The ATO is reviewing related guidance, including PCG 2017/13 on matured sub-trust arrangements.
The statement closes sixteen years of dispute on the narrow question. The statement opens a practical question for every family group: what happens to the loan agreements signed in reliance on the old view. The answer follows.
Do Existing Complying Loan Agreements Still Apply After Bendel?
Existing complying loan agreements remain loans in fact, and minimum yearly repayments continue on their terms. Thousands of family groups converted UPEs into section 109N loans over sixteen years because the ATO demanded conversion. Bendel removes the original reason, and removes nothing else.
A signed loan agreement created a real debt. The ATO Decision Impact Statement states the point plainly: the agreement stands, repayments continue, and the loan is not unwound into a UPE.
Cancelling or forgiving such a loan is the trap. Debt forgiveness is a separate Division 7A trigger, and forgiveness of a complying loan produces the deemed dividend the agreement existed to avoid. Groups wanting out of legacy loan agreements exit through repayment, refinancing, or dividend set-off, never through tearing up the document. We review every legacy agreement against the deed and the resolutions before recommending any exit path.
Which UPE Group Does Your Trust Sit In?
Every unpaid entitlement to a corporate beneficiary now sits in one of three groups, and the group decides the action. The three groups from the ATO framework are set out below:
- Plain UPEs: entitlements never converted and never placed on sub-trust. No section 109N agreement is required, subject to the deed matching the Bendel pattern. Subdivision EA and section 100A exposure still needs checking.
- Sub-trust UPEs: entitlements set aside under the former PS LA 2010/4 practice. The entitlement is not a loan without more, and variations to the sub-trust terms need testing against the extended loan definition.
- Converted loans: UPEs already on complying section 109N terms. The agreements bind, repayments continue, and the 8.77 per cent rate applies for 2026-27.
Sorting the register is the first job on every post-Bendel file. The deed, the resolutions, and the financial statement treatment place each entitlement in a group. FY27 distribution resolutions then follow the group, not last year’s template.
Can Past Division 7A Assessments Be Corrected?
Past assessments that treated a plain UPE as a loan are correctable through amendment requests or objections. An open amendment period supports a straight amendment request. A closed period needs an objection with an extension of time request attached. Our guide on how to object to an ATO decision covers the deadlines and the extension factors in detail.
The correction pathway has limits. No adjustment is available where the parties signed a complying loan agreement or otherwise created an actual loan. The loan existed as a matter of fact. Each arrangement and each income year stands alone. Deemed dividends assessed on untouched UPEs under the old view are the recoverable category, and the amounts justify the review on many files.
How Does Bendel Interact With the 2026 Budget Trust Measures?
Bendel loosens the Division 7A treatment of corporate beneficiaries, while the announced trust minimum tax removes their benefit from 1 July 2028. The 2026-27 Federal Budget proposes a 30 per cent trustee-level tax on discretionary trust income, with no credit for corporate beneficiaries. The measure awaits legislation.
A UPE strategy rebuilt around Bendel therefore carries a two-year horizon under the announcement. Our analysis of bucket companies after the 2026 Budget models the contested rates and the restructure options. Groups planning around both forces sequence the Division 7A clean-up first and the structural decision second.
Which Risks Survive for Unpaid Entitlements?
Subdivision EA, section 100A, and the general anti-avoidance rule all survive Bendel untouched. Subdivision EA bites where a trust owing an entitlement to a company pays, lends to, or forgives the debt of a shareholder or associate. Section 100A bites where the entitlement arises under a reimbursement agreement and someone else takes the economic benefit.
A clean UPE on the balance sheet proves little on its own. Tracing where the trust money went, and who benefited, answers the real question. Deemed dividend exposure also arises on asset transfers out of companies. Our guide to Division 7A and CGT rollover deemed dividends covers that restructuring angle.
How Do Loan Repayments Interact With Dividends?
Minimum yearly repayments on legacy loan agreements are commonly funded by declaring a franked dividend and setting the amounts off. The company declares a dividend to the shareholder, the dividend satisfies the repayment obligation, and cash never moves. The dividend carries franking credits at the company rate, which shapes the shareholder’s top-up tax.
Our guide to franked vs unfranked dividends explains how the credits land in shareholder hands. Set-off arrangements need board minutes and shareholder records dated before 30 June, because an undocumented set-off leaves the repayment unpaid on the ATO’s reading.
What Mistakes Create Deemed Dividends Now?
Tearing up loan agreements, missing the higher 2026-27 repayment, and treating Bendel as a blanket exemption create the current deemed dividend risks. The live mistakes are listed below:
- Forgiving legacy loans. Forgiveness of a complying loan triggers its own deemed dividend, regardless of Bendel.
- Underpaying the minimum. The benchmark rate rose to 8.77 per cent, and schedules built on 8.37 per cent fall short by 30 June 2027.
- Skipping the deed check. Bendel turned on specific deed terms, and a different deed produces a different answer.
- Ignoring Subdivision EA. Trust funds flowing to shareholders while an entitlement sits unpaid create the dividend the UPE never did.
- Copying last year’s resolution. FY27 distribution minutes deserve drafting against the Decision Impact Statement, not against the withdrawn determination.
Frequently Asked Questions
Do UPEs still need a Division 7A loan agreement?
A plain unpaid present entitlement needs no section 109N agreement after Bendel, subject to the trust deed. Subdivision EA and section 100A exposure still needs review before any entitlement is left unpaid.
What is the Division 7A benchmark interest rate for 2026-27?
The benchmark rate for 2026-27 is 8.77 per cent. The rate rose from 8.37 per cent, and minimum yearly repayments rise with the rate.
Can an existing Division 7A loan agreement be cancelled after Bendel?
Cancellation or forgiveness of a complying loan risks a deemed dividend. The agreement created a real loan, and exits run through repayment, refinancing, or dividend set-off.
Is TD 2022/11 still ATO policy?
TD 2022/11 is being withdrawn following the Decision Impact Statement. The ATO accepts that a company’s failure to demand payment of an entitlement is not financial accommodation.
When are minimum yearly repayments due?
Payment of the minimum falls due by 30 June each income year. A shortfall becomes an unfranked deemed dividend for the shortfall amount.
Can tax paid under the old UPE view be recovered?
Assessments on untouched UPEs are correctable through amendment or objection, within limits. No recovery exists where the parties created an actual loan, and each year stands alone.
What Is the Next Step on Division 7A Loan Agreements?
Family groups hold a reset moment on Division 7A, and the announced 2028 trust measures put a clock on the planning. Book your free 30-minute strategy session with one of our directors. We sort the entitlement register, reprice the loan schedules at 8.77 per cent, and test the correction pathway for past years. Blackwattle Tax helps Australian family groups manage company loans and trust entitlements with specialist, director-level attention.
Schedule a FREE 30-minute consultation today to discover how we can help you make strategic decisions and streamline your business operations.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.