The Botella warning: put your Division 7A loans in writing
The recent Administrative Review Tribunal decision in Botella and Commissioner of Taxation [2026] ARTA 604 (Botella) shows the risks of relying on clauses in a private company’s constitution to support the existence of a complying loan agreement for the purposes of Division 7A of the Income Tax Assessment Act 1936 (ITAA 36).
The dispute: loans and constitutions
The dispute involved Mr John Botella, the sole shareholder of Pipeline Plumbing Developments Pty Ltd (PPD). During the 2018 income year, PPD advanced money to Mr Botella and recorded these amounts as book entries in a loan account.
The advances needed to comply with subsection 109N(1) of the ITAA 36 to avoid the loans being taken to be dividends under section 109D of the ITAA 36 to Mr Botella. This required that the agreement under which the loans were made be "in writing" before PPD’s lodgment day for the 2018 income year.
PPD’s Constitution tried to automate Division 7A compliance through two provisions:
Clause 19 stated that "every 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".
Schedule 1 contained a pro-forma "Loan Agreement" with terms that PPD intended to satisfy section 109N of the ITAA 36, including the benchmark interest rate and maximum loan terms.
Mr Botella argued that because PPD’s constitution "deemed" the 2018 income year loans to follow these terms and he had "sufficient compliance" to satisfy the statutory requirements under subsection 109N(1).
The Tribunal rejected that argument.
Why the "deeming" clause failed
The Tribunal noted several points about Division 7A compliance:
"Made under" a written agreement: Paragraph 109N(1)(a) of the ITAA 36 requires that the loan be "made under" a written agreement. Here, PPD made the loans via conduct (advances and book entries) throughout the year:
82. In effect, the deeming clause does not provide that any loan is “made under” a written agreement. This is because the essential terms of the agreement, namely, the agreement whereby PPD agreed to loan Mr Botella a specified sum of money, and Mr Botella agreed to repay that money to PPD was not made under a written agreement but by virtue of advances taking place. Therefore, the deeming clause cannot turn a “loan” (an advance of money) which occurred by conduct, and which was then recorded as a book entry, into a loan agreement which is made under an agreement that is in writing.
Constitution vs. contract: While a company's constitution regulates relations between members, it does not prevent or automatically replace the need for an individual member to contract specifically with the company for a loan.
83. This conclusion is reinforced by the fact that PPD’s Constitution itself could not be “the agreement” under which the loans were made, as it did not record an agreement between PPD and Mr Botella, personally. In Bailey v New South Wales Medical Defence Union Limited (1995) 184 CLR 339, the presence of an article providing that the company would indemnify its members in respect of liability arising out of their professional medical practices was not considered to confer entitlement on them, as members, as the provision had effect as part of an actual contract that was previously made between the company and the members.
Wholly in writing: The Tribunal decided that the phrase "is in writing" implies the agreement must be “wholly” in writing. A deeming clause in a private company’s constitution cannot retroactively transform a loan that parties made by conduct into a written contract.
84. In the present case, even if there were a special contract between PPD and Mr Botella, personally, which arose by their conduct due to the advances made, the deeming clause in PPD’s Constitution only served to highlight that the loan was not “made under” a written agreement that was wholly “in writing”. To the extent that the applicants relied solely on PPD’s Constitution as the source of their written agreement, it was clear the loans made were not separately agreed in writing but undertaken by way of advances and book entries.
Because no specific written agreement existed between Mr Botella and PPD before the lodgment day of PPD’s 2018 income tax return, under section 109D of the ITAA 36 the loans (totalling over $1 million) were taken to be dividends to Mr Botella.
Comparing Botella with Taxation Determination TD 2008/8
The outcome in Botella aligns with the ATO’s views in Taxation Determination TD 2008/8.
TD 2008/8 provides that, for the purposes of section 109N of the ITAA 36, “the entire agreement” must be in writing, including the names of the parties, the specific loan amount, the date of drawdown, the repayment period, and the interest rate.
Example 4 of TD 2008/8 describes a situation where a constitutional clause can comply with the requirements of section 109N of the ITAA 36. However, in that example, the shareholder and the company separately agreed in writing that the constitutional terms would apply to the specific loans.
In Mr Botella’s case, however, no such separate written agreement existed between himself and PPD prior to PPD’s lodgment day. Without that external "link" in writing, the constitutional pro-forma agreement remained a general template rather than a specific, binding, loan contract.
Paragraph 29 of TD 2008/8 supports this position:
29. Where a private company's constitution includes a clause that sets out the terms and conditions under which a loan may be made to a member, membership in itself does not mean a member will be bound by this clause. Where the loan agreement between the member and the company is implied partly from the company's constitution and partly from the conduct of the parties, it is not a deemed contract under section 140 of the Corporations Act 2001 created as a consequence of a person becoming a member. Rather as in Bailey v. New South Wales Medical Defence Union Ltd, the contract between the member and the company is a separate agreement within the meaning in paragraph 24 of this Determination between a borrower and a lender. Such a contract will only be fully constituted after the shareholder receives a loan from the company based on the terms set out in the loan clause.
Is Botella the correct decision?
The decision in Botella raises questions about the rigour of complying with subsection 109N(1) of the ITAA 36. The Tribunal has set a high evidentiary bar by deciding that the loans in Botella were by "conduct" rather than "under" a written document.
Is the Tribunal’s interpretation unduly narrow by insisting that the loan agreement be "wholly in writing" and that a constitutional "deeming" clause, of itself, is insufficient to bridge the gap between physical advances and written terms?
An appeal to the Federal Court may provide interesting reading.
Practical points for Division 7A compliance
Botella shows why a standalone written loan agreement is best practice for Division 7A compliance. Private companies relying on constitutional provisions or generic, standing documentation (without clear evidence of an agreement governing the specific advances) may find these insufficient to constitute a complying agreement under section 109N of the ITAA 36, particularly where the loans arise through ongoing drawdowns and ledger entries.
Sladen Legal regularly assists clients with Division 7A matters. As we approach the lodgement date for many private companies’ income tax returns for the 2025 income year, private companies and their shareholders (and associates) should review their records and assess whether they have (or need to put in place) complying written loan agreements for the purposes of Division 7A.
Please contact us if you have any questions.
Edward Hennebry
Special Counsel
M +61 428 439 730 | T +61 3 9611 0113
Eehennebry@sladen.com.au
Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T +61 3 9611 0120
E: klowdon@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
