Many constitutions contain provisions that deem loans by the company to a shareholder (member) to be pursuant to a complying Division 7A loan agreement or include wording of similar effect.
The recent Administrative Review Tribunal decision of Botella and Commissioner of Taxation (Taxation and business) [2026] ARTA 604 (Botella) highlights concerns by the Tribunal of relying solely on provisions of the relevant constitution to comply with Division 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). References to legislation are references to the ITAA 1936 unless expressed otherwise.
In Botella the Tribunal made it clear that failing to provide a written loan agreement before a draw down was made by a shareholder resulted in a deemed dividend under Division 7A. This was the decision in Botella, even though the company’s constitution allowed loans to shareholders only when they were under a Division 7A loan agreement.
Facts
This following is a simplified, a high-level summary of the facts of Botella:
- The constitution of the company contained provisions that attempted to deem all loans made to members to be Division 7A compliant loans with reference to a pro-forma loan agreement in the schedule to the constitution. Paragraph 42 of the decision summarises the relevant clause and loan agreement:
…Clause 19 of the Constitution relevantly stated that “[e]very Loan made by the Company to a member is deemed to be made in accordance with the Loan Agreement in Schedule 1 of this Constitution. This Loan Agreement continues to apply if a member ceases to be a member.” Schedule 1 stated that “this is the Loan Agreement referred to in clause 19 of the Constitution”. Schedule 1 being the Loan Agreement set out the rate of interest payable, maximum term, terms and conditions for every Loan made by the Company to any Member. Relevantly, the Recitals of the Loan Agreement included the following: “The Company and the Member have agreed to enter into this Agreement to set out the terms and conditions of every Loan by the Company to the Member” and “the Company and the Member desire that all Loans meet the criteria set out in section 109N of Division 7A … and are therefore not taken to be dividends”…
- Payments were made by the company to the shareholder and recorded as loans in the company’s accounts.
- The template loan agreement in schedule 1 of the relevant constitution was not executed.
- The Commissioner issued an assessment that the loans received by the shareholder were dividends under Division 7A.
- The taxpayer (shareholder) objected to the assessment.
Decision
The key issue decided by the Tribunal for Division 7A purposes was whether the criteria in s 109N(1)(a) was met in respect of the loans. In particular, this depended on whether the agreement that the loan was made under was in writing and in place before the lodgement date for the company in the relevant income year.
The Commissioner submitted that the loans were not complying Division 7A loans because:
- Section 109N(1)(a) requires that the agreement that the loan was made under is in writing and must be in place before the company’s lodgement day.
- The expression ‘is in writing’ in s 109N(1)(a) in the context of an agreement for a loan refers to an agreement which must be wholly in writing.
- An agreement that is partly implied from conduct and partly in writing does not satisfy s 109(1)(a) as the agreement is not wholly in writing.
The Tribunal agreed with the Commissioner’s submissions as stated in paragraph 82 of the decision:
I agree with the Commissioner’s view that the deeming of the pro-forma loan agreement…cannot satisfy the requirement that the agreement that the loan was made under is in writing, in particular, since the deeming clause operated in relation to advances of money already made…This is because the essential terms of the agreement… was not made under a written agreement but by virtue of advances taking place… the deeming clause cannot turn a “loan” (an advance of money) which occurred by conduct… into a loan agreement which is made under an agreement that is in writing.
Lessons for advisers and taxpayers
Although the decision in Botella held that the deeming clause in the constitution could not operate turn advances of money already made into a complying loan agreement, a Division 7A loan agreement under s 109N(1) is only required to be put in place prior to the company’s lodgement date for the year of income that the loan is made (ie, the agreement can be put in place after the draw down is made). However, best practice is to have an agreement in place as soon as practicable and ideally prior to any loan commencing.
While many constitutions contain provisions that seek to deem payments by a company to a member to be Division 7A loans, care must be taken to ensure that the essential terms of the loan are still recorded in writing in an appropriate agreement.
The DBA Lawyers’ constitution contains such provisions and we also provide a template loan agreement that should be completed to satisfy the criteria in s 109N(1)(a).
Directors and shareholders of companies should also be mindful of the other Division 7A criteria to ensure that a deemed dividend does not arise. The ATO has recently updated its webpage on tips and common errors for Division 7A loans (see, Make your Division 7A loan payments count). This includes, among other things:
- Ensuring Division 7A loan payments for each income year are at least equal to the required minimum yearly repayment.
- Calculating minimum yearly repayments using the correct benchmark interest rate and paying by 30 June.
- Keeping sufficient contemporaneous evidence (in addition to journal entries) to show what payments were made and when they were made. Indeed, its best to have each advance agreed to by both the company and the relevant member.
Conclusions
The Botella decision and recent ATO guidance highlight that relying on journal entries and standard provisions in a constitution without sufficient written material may not satisfy Division 7A. Advisers and clients should carefully manage Division 7A arrangements to avoid a deemed dividend arising. Naturally, DBA Lawyers would be pleased to assist.
Related articles:
- Recent case law on UPEs and Div 7A – what should you tell clients?
- The role of tax advisers in legal documents and business continuity
- What you can expect in DBA Lawyers branded company documents
- What does Bendel mean for SMSFs?
- Is your discretionary trust still discretionary? Case law developments on trustee duties
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler, Director ([email protected]), Cassandra Hurley, Lawyer ([email protected]) and Fraser Stead, Lawyer ([email protected])
DBA LAWYERS
7 September 2026
