Division 7A Loan Agreement (Australia)

1.1 Advance: The Lender lends to the Borrower the principal sum of AUD 120,000.00 (the "Loan") on the date of this Agreement.

1.2 Division 7A purpose: The Lender is a private company and the Borrower is a shareholder. A loan from a private company to a shareholder or their associate is treated as an assessable unfranked dividend under Division 7A unless, before the Lender's lodgment day for the income year in which the Loan is made, the Loan is either repaid or placed under a complying loan agreement that satisfies section 109N of the Income Tax Assessment Act 1936 (Cth). This Agreement is intended to be that complying loan agreement.

1.3 Three requirements (s 109N): A complying loan agreement must (a) be in writing before the lodgment day; (b) charge interest for each year after the year the Loan is made at a rate at least equal to the Division 7A benchmark interest rate; and (c) have a term not exceeding the maximum term — 7 years for an unsecured loan, or 25 years where the Loan is secured by a registered mortgage over real property and the requirements of s 109N(3) are met.

2.1 Term: The Loan has a maximum term of 7 years from the end of the income year in which it is made (a 7-year unsecured loan). The Loan must be fully repaid by the end of that term.

2.2 Interest: Interest accrues on the unpaid balance of the Loan at 8.37% per annum. For each income year after the year in which the Loan is made, the interest rate must be at least the Division 7A benchmark interest rate for that year — the benchmark rate for the 2025-26 income year is 8.37%. The benchmark rate is set by the Australian Taxation Office each year and the rate under this Agreement will be adjusted so that it is never less than the benchmark.

2.3 Minimum yearly repayments: The Borrower must make a minimum yearly repayment of principal and interest in each income year after the year the Loan is made, calculated under section 109E of the Income Tax Assessment Act 1936 (Cth). Repayments are made on at least an annual basis so that the total repaid in each income year is at least the minimum yearly repayment for that year.

2.4 Consequence of shortfall: If the Borrower does not pay at least the minimum yearly repayment by the end of an income year, the shortfall may be treated as an unfranked deemed dividend assessable to the Borrower under Division 7A for that year.

3.1 Payments: All payments are made in cleared funds to the Lender, free of set-off or counter-claim. Payments are applied first to accrued interest and then to principal.

3.2 Prepayment: The Borrower may repay the whole or any part of the Loan at any time. Repayments reduce the balance on which interest accrues and the minimum yearly repayment for later years.

3.3 Entire agreement: This Agreement records the whole of the loan arrangement and may only be varied in writing signed by both parties, provided any variation continues to satisfy the complying-loan requirements of Division 7A.

3.4 Governing law: This Agreement is governed by the laws of New South Wales and the Commonwealth of Australia. The parties submit to the jurisdiction of the courts of New South Wales.

Lodgment day: The Lender's "lodgment day" for the 2025-26 income year is 15 May 2027. This Agreement is entered into before that lodgment day.

Written before lodgment day (section 109N(1)(a)): The parties confirm that this Agreement was made in writing, and signed by both parties, before the Lender's lodgment day for the income year in which the Loan was made. A complying loan agreement made after the lodgment day does not prevent the Loan being a deemed dividend.

Interest at or above benchmark (section 109N(1)(b)): The interest rate of 8.37% per annum is at least the Division 7A benchmark interest rate of 8.37% for the 2025-26 income year. For each later income year, the rate will be reset, if necessary, to at least the benchmark rate published by the Australian Taxation Office before the start of that year (the Reserve Bank of Australia "Housing loans; Banks; Variable; Standard; Owner-occupier" indicator rate).

Maximum term (s 109N(3)): The maximum term is 7 years. This is an unsecured loan, so the 7-year maximum term applies.

Distributable surplus (s 109Y): Any deemed dividend under Division 7A is limited to the Lender's distributable surplus for the income year, calculated under section 109Y of the Income Tax Assessment Act 1936 (Cth).

Section 109E formula: The minimum yearly repayment for an income year is calculated as: the amount of the Loan not repaid at the end of the previous income year, multiplied by the benchmark interest rate, divided by [1 − (1 + benchmark rate)^{−(remaining term)}], where the remaining term is the maximum term less the number of years already elapsed.

Indicative first-year repayment: On the principal of AUD 120,000.00, a benchmark rate of 8.37% and a 7-year term, the indicative minimum yearly repayment for the first repayment year is approximately AUD 23,341.16. This is indicative only — the actual minimum yearly repayment is recalculated each year using the then-current benchmark rate and the balance outstanding, and should be confirmed with the ATO Division 7A calculator.

First repayment year: The first minimum yearly repayment is due in the income year after the income year in which the Loan was made. No minimum repayment is required in the year the Loan is made.

Early and additional repayments: The Borrower may make additional repayments at any time. Additional repayments reduce the balance on which future minimum yearly repayments are calculated. Repayments are disregarded for Division 7A purposes to the extent the Borrower borrows a similar or larger amount from the Lender around the same time (section 109R).

Repayment account: Repayments are made to the Lender's nominated bank account (BSB 062-000, Account 1234 5678).

Additional repayment terms: The Borrower intends to repay the Loan in full from an expected dividend distribution in the 2027-28 income year, in addition to the minimum yearly repayments.

Unsecured loan: This Loan is unsecured. No mortgage or other security is granted, and the 7-year maximum term applies. If the parties wish to extend the maximum term to 25 years, the Loan must be secured by a registered mortgage over real property meeting the 110% value test in section 109N(3), and this Agreement must be amended accordingly before the Lender's lodgment day.

Events of default: An event of default occurs if the Borrower fails to pay any amount when due, fails to make a minimum yearly repayment, becomes bankrupt or insolvent, or breaches a material term of this Agreement. In addition: The Borrower ceases to be a shareholder or associate of the Lender; or any security granted to a third party ranks ahead of the Lender without consent.

Acceleration: On an event of default, the Lender may, by written notice, declare the whole of the outstanding balance (including accrued interest) immediately due and payable, and enforce any security granted under this Agreement.

Deemed dividend consequences: The parties acknowledge that if this Agreement ceases to be a complying loan, or a minimum yearly repayment is not made, an amount may be treated as an unfranked dividend assessable to the Borrower under section 109D or section 109E of the Income Tax Assessment Act 1936 (Cth). A deemed dividend is generally unfranked and cannot be franked except where the Commissioner exercises the discretion in section 109RB. Any deemed dividend is limited to the Lender's distributable surplus (section 109Y).

Anti-avoidance: The parties acknowledge the Division 7A integrity rules, including section 109R (repayments disregarded where re-borrowing is intended), section 109T (loans through interposed entities), and section 109W. The parties will not enter into any arrangement a purpose of which is to avoid the operation of Division 7A.

Tax advice: Division 7A is complex and the consequences of non-compliance are significant. The parties should obtain professional tax advice and use the ATO Division 7A calculator to confirm the minimum yearly repayment for each income year.