R&D Tax Incentive – Enforceable Loan
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What is an Enforceable Loan?
An enforceable loan is a legally binding agreement where a borrower is obligated to repay the lender under agreed terms. It typically includes a written contract, clear repayment obligations, and financial risk for the lender.
For the R&D Tax Incentive, enforceable loans matter because associate costs must be paid, not just incurred. If an entity provides R&D services but isn’t actually paid—such as leaving the amount unpaid in a trust structure or as a director loan—it may not qualify for the tax offset.
The ATO’s Grey Area: When Is a Loan “Paid” for R&D?
The ATO has strict rules around payments for associate costs in R&D claims, but it’s unclear if a loan agreement counts as a “paid” expense. This is where enforceable loans come in—but there’s no official ruling on whether they satisfy R&D eligibility requirements.
The Bendel case further complicates things. The ATO’s long-standing position on loans was overturned in this decision, meaning their view of what qualifies as a loan is now legally uncertain.
The Bendel Case: Why the Definition of a Loan Matters
A recent court ruling, Commissioner of Taxation v Bendel [2025] FCAFC 15, overturned the ATO’s long-standing position on unpaid present entitlements (UPEs). The court ruled that:
- A UPE is not a loan unless there is a clear obligation to repay.
- The ATO’s previous interpretation of what constitutes a loan was too broad.
- Only real loans with repayment terms can be classified under Division 7A’s deemed dividend rules.
Unsure if your R&D loan meets ATO requirements?
Call Bulletpoint on1300 658 508 before lodging your claim.
What Does This Mean for R&D Claims?
The Bendel case only applied to Division 7A, but it raises a major question:
- If a UPE isn’t a loan for tax purposes, does that mean an unpaid R&D associate payment isn’t a loan either?
- Can companies use enforceable loans as a workaround to meet R&D eligibility rules?
- Will the ATO issue new guidance or will this issue remain legally untested?
Right now, there’s no clear answer—but businesses need to be careful in how they structure their payments.
What an Enforceable Loan Needs to Have for potential R&D Eligibility
To strengthen the argument that an R&D-related loan qualifies as a “paid” expense, it should include:
- Awritten loan agreement– A formal document stating the loan terms, borrower and lender details, and repayment obligations.
- A clear obligation to repay– The borrower must be legally required to pay back the funds under enforceable terms.
- Defined repayment terms – The loan should specify repayment dates, instalments, or a structured plan.
- Commercial interest rates – If the loan is interest-free, it may be seen as a non-genuine arrangement.
- Evidence of actual repayments – Regular payments should be made, backed by bank records or accounting entries.
- A financial risk to the lender – If there’s no real expectation of repayment, the loan may be questioned by the ATO.
- Arm’s length terms – If the lender is an associate, the loan should reflect normal commercial arrangements.
Without these elements, the ATO could argue that the loan does not qualify as a real payment, making the R&D claim ineligible.
Example: $500,000 Director Loan for R&D – Meeting Enforceability Standards
Let’s say a director lends $500,000 to their company to fund R&D activities. If structured correctly, the company may be able to claim the R&D Tax Incentive on associate payments made using the loan. However, to potentially meet the ATO’s requirements, the loan must be structured as an enforceable financial arrangement, not just an internal transaction.
Here’s how to ensure the loan is commercially legitimate and enforceable under tax law:
1. Loan Agreement Signed
A formal written loan contract must be in place, clearly stating:
- The loan amount ($500,000)
- The borrower (the company) and the lender (the director)
- The loan term (e.g., five years)
- The repayment schedule
- The interest rate applied
- Consequences of non-payment or default
This agreement should be legally enforceable, signed by both parties, and drafted in a way that would be accepted in a commercial lending arrangement. Without it, the ATO may consider the loan not genuine and disqualify the associated R&D payments.
2. Defined Repayment Schedule
The company must agree to repay the loan in structured instalments, rather than leaving it as an open-ended obligation.
For example, a $500,000 loan over five years could be structured as:
- Annual repayments of $100,000, plus interest
- Fixed due dates for each repayment
- Payments made via bank transfer or another trackable method
A repayment schedule shows that the loan is a genuine financial liability, rather than an attempt to shift funds without a real obligation to repay.
3. Interest Applied – Division 7A Benchmark Rate
To be seen as commercially reasonable, the loan should charge interest at or above the ATO’s Division 7A benchmark rate.
For the 2024-25 financial year, the ATO’s Division 7A benchmark interest rate is 8.77% (source).
Applying a commercial rate of interest:
- Reinforces the legitimacy of the loan
- Ensures the director earns a return on the funds loaned to the company
- Aligns with what a third-party lender would require in a similar scenario
An interest-free or below-market-rate loan could raise red flags with the ATO and weaken the argument that the loan qualifies for the R&D Tax Incentive.
4. Loan Repayments Must Be Made
The company must actually repay the agreed amounts, and these repayments should be:
- Documented through bank statements or financial records
- Recorded in accounting entries as reductions in the loan liability
- Paid on time and in full as per the loan agreement
If repayments are missed, deferred, or not documented, the ATO could argue that the loan was never genuinely enforceable and reject the R&D claim.
5. Accounting Entries and Loan Disclosure
The loan and all repayments should be clearly recorded in the company’s financial statements, including:
- Loan liability recorded in the balance sheet
- Interest expense recorded in the profit and loss statement
- Director’s financial statements reflecting loan repayments received
Failure to properly disclose the loan in financial records may indicate that the arrangement is not commercial in nature, which could lead to an audit risk.
A poorly structured loan could cost you thousands in lost R&D incentives
Message Bulletpoint to check your eligibility today.
What Happens If the Loan Isn’t Structured Correctly?
If a company leaves a $500,000 loan as an unpaid balance without a formal agreement, repayment schedule, or commercial interest rate, the ATO is unlikely to recognise it as a genuine financial obligation.
- Not a genuine financial obligation – Without proper documentation, the ATO may see the loan as an informal arrangement rather than a real debt.
- Not “paid” for R&D eligibility – If the loan isn’t enforceable, any R&D-related payments made using it may not qualify for the R&D Tax Incentive.
- Potentially an uncommercial loan, subject to tax implications – The ATO may classify it as an uncommercial loan, triggering additional tax liabilities or compliance risks.
If the loan isn’t structured correctly, the risks include:
- Disqualification of the R&D tax offset – Associate payments funded by the loan may not meet eligibility criteria.
- Additional tax liabilities – The director or company may face unexpected tax consequences.
- Potential penalties or interest charges – ATO audits or reassessments could result in penalties for non-compliance.
Before using a loan to fund R&D, it’s critical to ensure it’s properly structured and meets the ATO’s commercial lending standards. But that still might not be enough.
A Properly Structured Loan Still Isn’t a Guarantee
Even if you have a documented, enforceable loan, there is no absolute guarantee that the ATO will accept it as a “paid” R&D cost.
“The Bendel case and recent ATO rulings suggest that what qualifies as a loan in one tax context does not necessarily apply to R&D eligibility.”
That’s why seeking expert advice before submitting an R&D claim is essential. To minimise risk:
- Ensure the loan has commercial terms and documentation – The agreement must mirror real-world lending practices.
- Follow the Division 7A benchmark interest rate – For 2024-25, this is 8.77% (source).
- Make sure repayments are made as agreed – A genuine loan requires actual repayments, not just a paper agreement.
- Consult an R&D tax expert before lodging your claim – A mistake here could cost you thousands in lost incentives.
For more insights into how director loans impact R&D claims, read this guide.
Need expert guidance? Book a call or call 1300 658 508 before lodging your R&D claim.
FAQ
Yes, but the loan must be commercially enforceable and structured correctly. The ATO may not accept informal loans, unpaid balances, or internal transfers as valid payments for R&D claims.
Maybe. The ATO requires associate costs to be paid, not just incurred, but there is no clear ruling on whether a loan meets this requirement. The loan must have repayment terms, commercial interest, and actual repayments to strengthen its case.
For loans involving associates or directors, the ATO expects a commercial interest rate. The Division 7A benchmark interest rate for 2024-25 is 8.77% (source). Using a lower rate may raise red flags.
If the loan doesn’t have clear terms, a repayment schedule, or interest applied, the ATO may not consider it a genuine financial obligation. This could lead to R&D claim rejection, tax liabilities, and potential penalties.
Get expert advice before lodging your claim. At Bulletpoint, we’ve helped hundreds of businesses structure their R&D payments correctly to avoid costly mistakes. Book a call or call 1300 658 508 today.
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