With the benchmark interest rate for Div 7A purposes expected to jump to 8.27% for the 2023-24 income year, from 4.77% in the 2022-23 income year, it is a good time to consider:
- Whether current division 7A loan arrangements are still financially viable for clients, particularly where the interest income to the lender is treated as assessable income, but no deduction is allowed to the borrower.
- The overall financial impact of putting new Division 7A loan agreements in place, for example comparing with the cost of immediately paying a franked dividend of the full amount (subject to the clients’ cash flow).
It will be important to communicate to clients, the increase in minimum yearly repayments which will be required because of the significant increase in the interest rate, and the increased overall costs over the life of the loan.
Now is the time to start having discussions with clients about different funding options, especially where their cash flow is dependant on Division 7A loans.