Safe Harbour Rate 2025-26 Set at 8.95%: Compliance for Related-Party Loans

Introduction

The Australian Taxation Office (ATO) has confirmed the Division 7A benchmark interest rate—often called the safe harbour rate—for the 2025–26 income year at 8.95% per annum. This rate, effective from 1 July 2025, applies to loans made by private companies to shareholders or their associates. For Australian mortgage borrowers using related-party financing, the 8.95% threshold triggers immediate compliance considerations under section 109N of the Income Tax Assessment Act 1936. The ATO’s announcement, available on its benchmark interest rate page, follows a quarterly reset tied to the Reserve Bank of Australia’s (RBA) indicator lending rate plus a fixed margin.

What the safe harbour rate covers under Division 7A

Under Division 7A, a loan from a private company to a shareholder or an associate is treated as an unfranked dividend unless the loan meets specific criteria. One exemption is a loan that complies with minimum interest rate and maximum term requirements. The safe harbour rate is the minimum annual interest rate that must be charged to avoid the loan being deemed a dividend. For the 2025–26 year, that minimum is 8.95%. Loans secured by a registered mortgage over real property may use a different benchmark—the RBA’s indicator rate for standard variable housing loans plus a margin of 4.00%—but the ATO’s published safe harbour for unsecured related-party loans is 8.95%.

The term safe harbour signals that charging at or above this rate will not attract Division 7A consequences, provided the loan also meets other conditions: a written agreement, maximum loan term of seven years (or 25 years if secured by a mortgage over real property), and minimum annual repayments of principal and interest. Failure to meet any condition converts the entire loan to a dividend in the year of breach.

The ATO’s methodology for 2025–26: why 8.95%?

The ATO calculates the benchmark interest rate by taking the RBA’s Indicator Lending Rate for Personal Unsecured Loans – Variable (published in RBA Statistical Table F5) for the month of May immediately before the income year, and adding a margin of 4.00 percentage points. In May 2025, the RBA indicator rate stood at 4.95%, yielding a safe harbour rate of 8.95%. This represents a 68 basis point increase over the 2024–25 rate of 8.27% and continues the upward trajectory from 2022–23 (7.05%) and 2023–24 (8.85%). The 8.95% figure is the highest since before the global financial crisis, reflecting monetary tightening cycles that pushed the RBA cash rate to 4.35% by early 2025 and subsequent transmission to unsecured lending rates.

By anchoring the rate to RBA data, the ATO ensures objectivity. The 4.00% margin has remained constant since the rules were introduced, meaning the safe harbour moves in lockstep with the credit cycle. For company directors and their advisers, the 8.95% rate is not discretionary; it is the statutory default unless the loan is secured by a mortgage.

Compliance triggers for mortgage borrowers and property investors

Many Australian mortgage borrowers use related-party loans to fund property deposits, renovations, or bridging finance. A typical scenario is a private company lending to a shareholder to assist with a residential purchase. In 2025–26, any such loan without a complying interest rate of at least 8.95%—and documented terms meeting the maximum period rules—will expose the borrower to a deemed unfranked dividend at the shareholder’s marginal tax rate (up to 47% including Medicare levy). The quantum of the deemed dividend is the entire loan principal in the year the breach occurs, not just the interest shortfall.

For loans exceeding $100,000, the compliance burden intensifies. The ATO’s compliance approach to Division 7A, outlined in its detailed guide, emphasises that even inadvertent failures—such as a late annual repayment or an expired loan term—can trigger dividend treatment. The 8.95% rate also interacts with the ATO’s safe harbour payment schedule: the minimum annual repayment is calculated as the loan principal divided by the maximum term, plus interest at the benchmark rate. In 2025–26, a $500,000 unsecured seven-year loan would require annual repayments of $71,428 in principal plus $44,750 in interest (8.95% on $500,000) for the first year, assuming equal principal reductions. This structure must be maintained each year or the loan loses its safe harbour protection.

Consequences of breaching the safe harbour benchmark

If a related-party loan fails to meet the 8.95% interest rate or associated repayment obligations, the entire outstanding balance is deemed an unfranked dividend paid to the borrower on the last day of the income year. For a borrower on the top marginal tax rate, this creates an immediate tax liability of $470,000 on a $1,000,000 loan. The company may also face franking account implications and potential Division 7A penalty taxes. Further, the ATO’s increased data-matching capabilities—drawing on corporate tax returns and shareholder loan reconciliations—make detection more likely. Since 2022, the ATO has issued over 12,000 compliance letters annually regarding Division 7A breaches, with a focus on property-related loans.

Beyond tax, a deemed dividend can affect loan serviceability calculations for future mortgage applications. Lenders assess net income after tax, and a large notional dividend reduces borrowing capacity. The safe harbour rate therefore operates as both a tax guardrail and a credit-impact factor.

Strategic considerations for related-party loans in 2025–26

Given the 8.95% rate, company shareholders contemplating a loan should evaluate whether the transaction remains commercially sensible. Alternatives include paying a franked dividend (subject to corporate tax and imputation), using a loan with a security to access the potentially lower housing-variable indicator rate, or shortening the loan term to reduce interest exposure. A privately owned company can also consider using a compliant loan agreement drafted by a tax lawyer to lock in the benchmark rate for the entire term.

For foreign residents, the safe harbour rate interacts with Foreign Investment Review Board (FIRB) conditions if the loan is used for Australian residential property. While FIRB does not set interest rates, any related-party loan must still comply with Division 7A, and the ATO may cross-check FIRB approvals. The 8.95% rate may also influence the thin capitalisation calculations for large entities with cross-border related-party debt, though the relevant safe harbour debt amount under Division 820 uses different benchmarks.

In practice, many tax agents recommend that clients benchmark their loans using the ATO’s online calculator and maintain meticulous records of repayments. The ATO’s safe harbour is objective: charge 8.95% or more, document the agreement, and meet the minimum repayment schedule, and the loan will not be deemed a dividend.

Conclusion

The ATO’s safe harbour rate for 2025–26 at 8.95% continues the trend of elevated benchmark rates driven by tighter monetary policy. For related-party lending connected to property transactions, compliance requires more than a nod to interest rates—it demands written agreements, strict repayment discipline, and awareness of Division 7A triggers. Borrowers, companies, and their advisers must recalibrate their internal loan structures before 1 July 2025. Information only, not personal financial advice. Consult a licensed mortgage broker or tax adviser.