Intercompany vs. Unintentional Div 7A Loans: Lessons from Traynor & Ors v Federal Commissioner of Taxation
Intercompany vs. Div 7A Loans: Lessons from Traynor & Ors v Federal Commissioner of Taxation
In Traynor & Ors v Federal Commissioner of Taxation [2026] ARTA 2024 (Traynor), the Administrative Review Tribunal (ART) has upheld assessments and administrative penalties issued to three members of a corporate group. The group included a number of companies and a main trading company (Trading Company).
The ART found that amounts recorded as loans in the financial statements of the Trading Company were loans for the purpose of Division 7A of the Income Tax Assessment Act 1936 (Cth) (Div 7A).
Background
Following an Australian Tax Office (ATO) audit, amounts recorded in the Trading Company’s financial statement were identified as loans (Loans) to taxpayers. The amounts of the Loans were not recorded in the taxpayers’ income tax returns and there were no written loan agreements in place.
The applicants argued that these amounts received from the Trading Company to the related companies should be treated as intercompany loans within the broader corporate group. The Commissioner considered that the Loans should be treated as dividends pursuant to Div 7A as the Loans had not been repaid or converted into complying loan agreements by the lodgement day.
The taxpayers argued that the movement of funds within the corporate group formed part of the overall working capital and funding arrangement. They contended that the transactions should not be characterised as dividends merely because those amounts appeared as loans in the Trading Company’s financial statements.
However, the corporate group failed to provide sufficient evidence tracing the flow of funds from the Trading Company to the other entities. The accounting practices involved an intermingling of profits and other sources of funds in a way that could not be unmingled, thus attracting application of Div 7A.
The ART confirmed that:
the structure of the group’s finances did not preclude the transfers as being treated as loans for the purpose of Div 7A; and
whilst the intermingling of funds was not improper, taxpayers that run a business through intermingling accounts must maintain records to allow intermingling of funds to be undone.
Key Takeaways
Traynor highlights the importance of maintaining sufficiently detailed records where related entities operate through shared banking and funding arrangements. The intermingling of funds within a corporate group will not, of itself, prevent Div 7A from applying where the underlying transactions cannot be undone.
Corporate groups may legitimately use shared banking facilities and make intercompany transfers; however, these arrangements may result in transactions being characterised as Div 7A loans.
For more information regarding Div 7A loans, please contact:
Alasdair Woodford
Principal
T: 03 5225 5217 | M: 0436 456 144
E: awoodford@ha.legal
Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M: 0491 307 550
E: jflanagan@ha.legal
Tayla Berger
Senior Associate
T: 03 5226 8559 | M: 0407 825 365
E: tberger@ha.legal
Jemimah Fitzgerald
Lawyer
T: 03 5225 5219
E: jfitzgerald@ha.legal
Prepared with the assistance of Pippa Duniam.
