Choosing between a company and a trust depends on your goals: a company offers limited liability and a flat tax rate of 25% or 30%, ideal for retaining profits, while a discretionary trust offers flexible income distribution and strong asset protection. Many established businesses use both, a company owned by a trust.

Choosing between a company and a trust is one of the most consequential decisions an Australian business owner will make — and it’s one that most people get wrong, either by choosing based on cost alone or by defaulting to whatever their first accountant set up years ago without thinking about whether it still fits. The right structure can save you tens of thousands of dollars in tax each year and protect everything you’ve built. The wrong structure can cost you far more. Let me break down the real differences between a company and a trust so you can make an informed decision.

Key Differences at a Glance

Both companies and trusts are used to operate businesses and hold assets in Australia. They are both separate from you personally in important ways, but they work very differently:

• A company is a separate legal entity incorporated under the Corporations Act 2001. It has its own legal identity, can enter contracts, owns its own assets, and pays its own tax.
• A trust is a legal relationship — not a separate legal entity — in which a trustee holds and manages assets for the benefit of beneficiaries. A discretionary (family) trust gives the trustee flexibility to decide who receives income each year.

The ATO provides guidance on business structures, but the nuances of which is right for you requires professional advice specific to your situation.

Tax Treatment: Company vs Trust

Tax is where the differences become most significant:

Company tax rates:

• Base rate entity (small company with passive income less than 80% of total income and aggregated turnover under $50 million): 25%
• All other companies: 30%

Trust taxation:

• A trust itself does not pay income tax — instead, income is distributed to beneficiaries who each pay tax at their own marginal rate
• Undistributed trust income is taxed at 47% in the hands of the trustee — a strong incentive to distribute every year
• Individual beneficiaries can receive trust income at their personal marginal rates: 0% for those under the tax-free threshold, 19% for income $18,201–$45,000, 32.5% for $45,001–$135,000, 37% for $135,001–$190,000, and 45% (+2% Medicare levy) above $190,000

The key advantage of a trust is income splitting: the trustee can direct income to beneficiaries in lower tax brackets each year, minimising the overall family tax bill. A company cannot do this — profits stay in the company at 25–30% until paid out as dividends, at which point individual tax rates apply.

However, companies have a flat rate that is often lower than the top marginal rate, making them attractive for retaining profits in the business without distributing them.

Asset Protection: Company vs Trust

Both structures provide asset protection, but in different ways:

Company: A company provides limited liability to its shareholders — your personal assets are not at risk for the company’s debts (with exceptions, such as personal guarantees and director liability under insolvent trading laws). However, assets inside the company are exposed to creditors of the company.

Trust: Assets held by the trustee on behalf of the trust’s beneficiaries are generally protected from the personal creditors of those beneficiaries (since beneficiaries don’t own the assets). A discretionary beneficiary has no guaranteed entitlement, so creditors have very limited rights over trust assets.

In practice, trusts often provide superior asset protection when properly structured — particularly because the discretionary nature means no beneficiary can be said to “own” a specific share of the trust. This makes it harder for creditors to get their hands on trust assets compared to company assets.

Flexibility and Distributions

This is where trusts have a clear edge:

• A trust can distribute different amounts to different beneficiaries each year based on what makes sense from a tax perspective. Got a spouse who’s had a low-income year? Distribute more to them. Adult child studying with no income? Consider distributing to them (subject to the ATO’s rules on distributions to under-18s and the Section 100A integrity rules).
• A company can only pay dividends in proportion to shareholding. If you own 70% and your spouse owns 30%, dividends must be paid in that ratio. You cannot pay your spouse more just because it’s tax-effective this year.

The flexibility of a trust is genuinely powerful — but it must be exercised carefully and with proper documentation. Missing the 30 June resolution deadline, for instance, results in all trust income being taxed at 47%.

When a Company Wins

A company structure tends to be the better choice when:

• You need to retain profits in the business long-term — paying 25–30% company tax while reinvesting is far better than paying 47% personally
• You’re operating in an industry where a trust is not appropriate or creates complications (some professional services like law require specific structures)
• You want certainty of ownership — shares are clearly defined and easily transferred, making companies cleaner for equity arrangements with co-founders, investors, or key employees
• You’re planning to bring on outside investors, who expect a corporate structure
• You want to take advantage of the small business CGT concessions on sale of a business — these can be accessed through a company structure as well as a trust

When a Trust Wins

A trust tends to be the better choice when:

• You have a family group with varying income levels and want to split income tax-effectively each year
• You want maximum asset protection and don’t need outside investors
• You’re holding investment assets (property, shares) that you expect to sell eventually — the 50% CGT discount flows through to individual beneficiaries from a trust, not from a company
• You want flexibility to adapt distributions year to year
• You’re in the startup or growth phase of a business and not yet retaining significant profits

Using Both Together: The Trust + Bucket Company Structure

The most tax-effective structure for many successful Australian business owners is actually a family trust combined with a bucket company. Here’s how it works:

Larger groups often add a third layer, a holding company sitting between the trading company and the trust, so accumulated profits are held outside the entity that carries the trading risk.

• The business operates through (or under) a family trust
• The trustee distributes income to beneficiaries in lower tax brackets first
• Any excess income (that would otherwise be taxed at 47% in the hands of a high-income beneficiary) is instead distributed to the bucket company
• The bucket company pays company tax at 25–30% on that income
• Profits accumulate in the bucket company, ready to be invested or eventually paid out as dividends

This structure can dramatically reduce the overall tax paid on business profits. For example, a $100,000 distribution to a high-income beneficiary at 47% costs $47,000 in tax. The same $100,000 distributed to a bucket company at 25%, which is the rate that applies where the company is a base rate entity, costs only $25,000 — a saving of $22,000 on a single year’s distribution. Explore comprehensive tax planning strategies here.

How Pinnacle Approaches This With New Business Owners

When a new business owner comes to Pinnacle — whether they’re just starting out or have been operating for years under a suboptimal structure — we take a holistic view of their situation before making any recommendations.

We look at: current income and projected growth, family situation (spouse income, adult children), the nature of the business (professional services, trading, investment), plans for eventual sale or exit, and risk profile. From there, we model the tax outcomes under different structure scenarios so you can see clearly what each option actually means in dollar terms.

Many business owners come to us having never had this conversation with their previous accountant. That’s a missed opportunity we’re committed to fixing. Structure is not set-and-forget — as your business grows and your personal circumstances change, your structure should evolve with you.

Ready to review your structure? Get in touch with Pinnacle today. For a broader look at all structure options available to Australian business owners — including sole trader and partnership — read our complete business structures guide, or explore our dedicated business structuring services. You can also read about the different classes of shares a company can issue.

Frequently Asked Questions

Can I change from a trust to a company later?

Yes, but restructuring has tax consequences — it can trigger CGT on assets transferred and, in some states, stamp duty. The ATO does provide some restructure concessions under Division 122 of the ITAA 1997, but these are complex. It’s much better to get the structure right from the start, which is why upfront structural advice is so valuable.

Is a trust better than a company for tax?

It depends entirely on your circumstances. A trust offers more flexibility for income splitting across a family group. A company is better for profit retention at lower rates. The best outcome often comes from using both — a family trust distributing to a bucket company. Speak to Mina to model the right approach for your situation.

Do trusts pay company tax?

No. A trust distributes its income to beneficiaries, who pay tax at their own rates. If income is not distributed, the trustee pays tax at 47% — which is why annual trustee resolutions are critical. A corporate beneficiary (bucket company) will pay company tax on its share of trust income.

What are the compliance costs of a trust vs a company?

Both have compliance obligations. A company must file an annual tax return, maintain proper financial records, and meet ASIC obligations. A trust must file an annual tax return and, critically, pass trustee resolutions by 30 June each year. If you use a corporate trustee, you have the ongoing ASIC obligations of that company as well. Your accountant can manage all of this for you.

Can a trust and company be used together?

Absolutely — and for many business owners, this is the optimal structure. A family trust distributes income to a corporate beneficiary (bucket company) to cap the tax rate at 25–30%, rather than letting excess income hit a high-income individual at 47%. This is a well-established and ATO-compliant strategy when properly implemented.

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This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

Frequently Asked Questions

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Negative gearing has been one of the most debated tax strategies in Australia — especially following the 2025-26 Federal Budget discussions around housing affordability. Every election cycle, negative gearing returns to the headlines, drawing fierce opinions from economists, politicians, and property investors alike. Before you settle on whose name goes on the title, read why the ownership structure matters more than the early deduction.

But behind the debate lies a straightforward tax mechanism that hundreds of thousands of Australian investors use every year. Understanding how it actually works — and when it makes sense for your situation — is far more valuable than the political noise.

In this guide, we’ll explain exactly what negative gearing is, how the tax deduction works in practice, what costs you can and can’t claim, how it intersects with capital gains tax, and what the 2026-27 Budget reforms to negative gearing and CGT, now law and applying from 1 July 2027, mean for property investors. Whether you’re considering your first investment property or reviewing an existing portfolio, this guide gives you the full picture.

What Is Negative Gearing?

A property — or any income-producing investment — is negatively geared when the costs of owning it exceed the income it generates.

In practice, this means your rental income is less than your total expenses for the year. The shortfall — that annual loss — can then be deducted against your other income, such as salary, wages, or business income. This reduces your overall taxable income and, as a result, your tax bill.

It’s worth noting that negative gearing isn’t exclusive to property. The same rules apply to shares purchased with a loan, managed funds, and other income-producing investments. But in Australia, negative gearing is most commonly associated with residential investment property — and that’s where most of the policy debate has been focused.

Here’s a straightforward example to illustrate the concept:

• Rental income: $28,000 per year
• Total costs (loan interest, council rates, insurance, depreciation): $38,000 per year
• Net rental loss: $10,000

That $10,000 loss is deductible against your other income. If you’re on a 37% marginal tax rate, your tax saving is $3,700 per year — reducing the real after-tax cost of holding the property from $10,000 to $6,300.

The reason investors accept an annual cash shortfall is the expectation that the property will grow in value over time. The strategy is to claim tax deductions today — reducing the net cost of holding the investment — then sell at a profit years later and pay capital gains tax at a discounted rate. For more on how tax planning strategies integrate with your overall financial structure, see our guide to tax planning for business owners and investors, and our perspective on whether a property capital gain is real wealth or just inflation.

How Negative Gearing Reduces Your Tax — A Worked Example

Let’s look at a realistic example to see exactly how negative gearing affects someone’s tax position.

Sarah is a project manager earning $120,000 per year. She’s in the 37% marginal tax bracket. She owns a rental property that generates $24,000 in rent per year, but her annual holding costs are:

Expense	Annual Amount
Loan interest	$28,000
Council rates	$1,200
Landlord insurance	$1,800
Depreciation (plant & equipment)	$4,000
Total costs	$35,000

Net rental loss: $35,000 − $24,000 = $11,000

This $11,000 loss is offset against Sarah’s employment income:

• Taxable income without property: $120,000
• Less: rental loss: −$11,000
• Adjusted taxable income: $109,000

At a 37% marginal rate, the tax saving on $11,000 is approximately $4,070 per year.

So while Sarah’s property is technically “losing” $11,000 on paper, her real after-tax cost is only $6,930 per year — because the ATO effectively subsidises $4,070 of that loss through reduced income tax. Meanwhile, Sarah expects the property to appreciate in value over time. When she eventually sells, if she’s held it for more than 12 months, she’ll qualify for the 50% CGT discount — meaning she’ll only pay tax on half the capital gain. (As explained below, for CGT events from 1 July 2027 the 50% discount is being replaced by cost base indexation plus a 30% minimum tax on capital gains, so gains accruing after that date are treated differently.)

This is the core logic of negative gearing: short-term tax deductions, long-term capital growth.

What Costs Can You Deduct?

Not all property expenses are treated equally by the ATO. There are two categories: those you can claim immediately in the year incurred, and those you must depreciate over time.

Immediately Deductible (in the year incurred)

You can claim the following in full in the income year you incur them:

• Loan interest (on the investment loan only — not any personal portion)
• Property management fees
• Council rates and water rates
• Landlord and building insurance
• Repairs and maintenance (restoring to original condition — not improvements)
• Body corporate and strata levies
• Advertising for tenants
• Pest control, cleaning, and gardening
• Accounting fees related to the investment
• Legal expenses for lease preparation (not property acquisition)

Depreciated Over Time (not immediately deductible)

Two categories of capital expenses must be claimed over time rather than upfront:

1. Capital works — Division 43: If the property was constructed after 15 September 1987, you can claim 2.5% of the original construction cost per year for 40 years. Many investors overlook this deduction entirely, often because they don’t have a quantity surveyor’s report to quantify it.
2. Plant and equipment depreciation: Depreciable assets with a limited effective life — dishwashers, carpets, blinds, hot water systems, air conditioners — are depreciated over their ATO-specified effective life. The effective life schedules are published by the ATO and vary by asset type.

Important exclusions:

• Travel expenses to inspect your rental property are no longer deductible — this was abolished from 1 July 2017.
• Expenses for periods when the property was used privately must be apportioned accordingly.
• Purchase costs (stamp duty, legal fees on acquisition) are capital costs that increase your cost base for CGT purposes — they are not immediate deductions.

A qualified quantity surveyor’s depreciation report typically costs $500–$800 but can uncover thousands of dollars in annual deductions. For the ATO’s full guidance on rental deductions, visit ato.gov.au.

Capital Gains Tax and Negative Gearing — The Full Picture

Negative gearing only makes financial sense if you genuinely expect the property to appreciate in value. The annual cash shortfall — even after the tax benefit — must ultimately be recovered through a profitable sale.

When you sell, you’ll pay capital gains tax on the profit: the sale price minus your cost base (which includes the original purchase price, buying costs such as stamp duty and conveyancing fees, and the cost of capital improvements made during ownership).

The critical concession for individual investors: if you’ve held the property for more than 12 months, you qualify for the 50% CGT discount. You only include half the capital gain in your assessable income for that year. This is the rule for CGT events up to 1 July 2027; for gains accruing after that date, see the section below on the 2026-27 Budget reform.

This creates a deliberate tax asymmetry that high-income investors actively use:

• Annual rental deductions: claimed at your full marginal rate (up to 47% including the Medicare levy)
• Capital gain on eventual sale: effectively taxed at roughly half your marginal rate (after the 50% CGT discount)

The strategy is to claim full deductions at a high rate now, then pay tax on the gain at an effective lower rate later. This is why negative gearing is so commonly used by high-income earners — the annual tax benefit reduces the cost of holding the asset while capital growth builds long-term wealth. See also our article on Division 7A loans and how tax rules interact with different investment structures.

The 2026-27 Budget Reform: What Actually Changed

Throughout 2025-26, negative gearing was a flashpoint in Australia’s housing affordability debate. Labor’s longstanding position was to “quarantine” negative gearing losses, so that losses on established property could only be deducted against rental income, not against salary or business income. In the 2026-27 Federal Budget, handed down on 12 May 2026, the Government acted, and the changes have since been legislated.

Where things stand now (as at September 2026): the changes are law. The ATO confirms on its new-legislation guidance that, from 1 July 2027, negative gearing is limited to new builds and the 50% CGT discount is replaced by cost base indexation plus a 30% minimum tax on capital gains for individuals, trusts and partnerships (Australian Taxation Office, reforming negative gearing and capital gains tax). The measures were legislated as the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

What this means in practice is important: negative gearing is being limited to new builds, not abolished. An investor who buys established residential property after Budget night (7:30pm AEST, 12 May 2026) can still deduct rental losses against their residential property income and carry unused losses forward, but from 1 July 2027 they can no longer deduct those losses against other income such as wages. Properties held before Budget night are grandfathered and continue under the current rules, and investors in eligible new builds keep both negative gearing and the choice of the 50% CGT discount.

The practical takeaway: the worked examples above reflect the rules that apply up to 1 July 2027, and that continue to apply to grandfathered and eligible new-build properties. If you are buying established residential property now, factor in that from 1 July 2027 the loss will offset property income only, not your salary or business income. Work with a registered tax agent to model your specific position, and verify the current rules directly with the ATO before making decisions.

Who Benefits Most from Negative Gearing?

Not every investor benefits equally from negative gearing. The tax advantage is directly proportional to your marginal tax rate — the higher your rate, the larger the benefit.

• High-income earners (37% or 45% marginal rates) receive the largest tax benefit. A $10,000 net rental loss saves between $3,700 and $4,700 per year in tax. For investors in lower tax brackets, the benefit is proportionally smaller.
• Investors with significant interest costs (high loan-to-value ratios) are more likely to be negatively geared, particularly in the early years of the loan when the outstanding principal — and therefore interest — is at its highest.
• Properties in genuine capital growth corridors — established inner-city suburbs in Melbourne and Sydney, and high-demand growth areas — are better suited to the strategy than low-growth regional markets where capital appreciation may not materialise to justify the annual shortfall.
• Investors who can comfortably service the cash shortfall. Negative gearing is not appropriate for investors who are stretched to their borrowing limit. The annual after-tax cash shortfall must remain manageable in all market conditions — including when interest rates rise.

Common Negative Gearing Mistakes

Negative gearing is a legitimate and well-established tax strategy, but the ATO actively scrutinises rental property deductions. These are the most common mistakes we see investors make:

1. Claiming capital expenses as immediate deductions. Replacing an entire bathroom suite is a capital improvement — not a repair. Repairs restore something to its original condition; improvements go beyond that. Getting this wrong is one of the ATO’s key audit triggers for rental properties.
2. Failing to apportion expenses. If your investment property was rented for only part of the year, or if you or family members used it personally at any point, all expenses must be apportioned for the periods of genuine rental use only.
3. Poor record-keeping. The ATO requires records to be kept for five years after lodging your return. This includes loan statements, rental statements from your property manager, invoices for all expenses, and rental agreements. Missing records at audit time can result in deductions being disallowed.
4. Mixing investment and personal loan funds. If you redraw on your investment property loan for personal purposes — a holiday, home renovations — you lose deductibility on that portion of the interest going forward. This is extremely difficult and costly to untangle once it has occurred.
5. Over-estimating capital growth. The investment must make commercial sense. If the capital growth assumption is unrealistic, the annual cash shortfall can compound over many years without the eventual upside to compensate.
6. Not commissioning a depreciation report. A quantity surveyor’s depreciation schedule typically costs $500–$800 and can reveal thousands in annual deductions — particularly Division 43 capital works deductions — that many investors simply don’t know to claim.

Negative Gearing vs Positive Gearing — Which Is Better?

Negative gearing attracts most of the attention, but understanding positive gearing helps you choose the right strategy for your circumstances.

Negatively geared: The property costs more to hold than it earns. You claim a deduction against other income now and aim for capital growth later. Best suited to high-income earners who can afford the annual shortfall and are focused on long-term wealth accumulation.

Positively geared: The property earns more than it costs. The surplus is additional taxable income each year, but your cash flow is positive without relying on capital growth to make the investment viable. Often better suited to investors who need income now — such as retirees or those in lower tax brackets where the negative gearing benefit would be minimal anyway.

Neither approach is universally superior. The right strategy depends on your marginal tax rate, your cash flow needs, your investment horizon, and the specific property you’re buying. A well-structured portfolio often includes both — negatively geared growth assets alongside positively geared yield properties that provide ongoing income. For a tailored analysis, our Virtual CFO service can model the actual numbers for your situation.

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⚠️ General Advice Warning: The information on this page is general in nature and does not constitute personal financial, tax or legal advice. Tax laws change regularly and what applies to negative gearing in Australia may be different by the time you read this. Always seek tailored professional advice from a registered tax agent before making investment decisions.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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Salary sacrificing lets nurses pay for certain expenses from pre-tax salary, which reduces taxable income and can lift take-home pay. Public and not-for-profit health employees often access generous FBT concessions, packaging living expenses up to an annual cap plus a separate meal entertainment cap, on top of salary sacrificing into super.

If you’re a nurse working in a public hospital, you may be leaving thousands of dollars on the table every year without knowing it. Salary sacrifice — particularly the FBT exemption available to public hospital nurses — is one of the most underutilised tax strategies in Australian healthcare. Yet most nurses have never been shown how to use it properly.

The good news? You don’t need a complicated strategy or a business structure to access these savings. In many cases, a simple conversation with your payroll department can put an extra $3,000 to $4,000 back into your pocket every year — completely legally.

In this guide, I’ll walk you through exactly how salary sacrifice works for nurses in Australia, including the powerful FBT exemption available to public hospital staff, how super and novated leases fit in, and the common mistakes that cost nurses money every year.

What Is Salary Sacrifice?

Salary sacrifice is an arrangement between you and your employer where you agree to receive a lower gross salary in exchange for your employer providing certain non-cash benefits. The key benefit? Those packaged items come out of your pre-tax income, which means your taxable income drops — and so does the tax you pay.

Here’s a simple example. If you earn $85,000 per year and you salary sacrifice $10,000 worth of approved benefits, you only pay income tax on $75,000. At the 32.5% marginal rate, that saves you around $3,250 in income tax.

Salary sacrifice is available to most Australian employees, but the types of benefits you can package — and how tax-effective they are — depends heavily on your employer. For nurses, the employer you work for makes an enormous difference.

The Big One: The FBT Exemption for Public Hospital Nurses

This is the section that will change how you think about your pay packet. If you work at a public hospital, you have access to one of the most generous tax concessions available to any employee in Australia — and most nurses don’t fully use it.

Why Public Hospitals Are Different

Under Australian tax law, public hospitals are classified as Public Benevolent Institutions (PBIs) under the Fringe Benefits Tax Assessment Act 1986. Because of this classification, the Australian Taxation Office grants them a special FBT exemption that allows their employees to salary package a generous amount of living expenses completely free of Fringe Benefits Tax.

For other employers, salary packaging benefits usually attracts Fringe Benefits Tax at a rate of 47%, which eats into most of the tax saving. But for PBI employers like public hospitals, that FBT simply doesn’t apply — up to a certain threshold.

The $9,010 Living Expenses Cap

As a nurse employed by a public hospital (or other PBI employer), you can salary package up to $9,010 per year in living expenses completely tax-free. This figure is set by the ATO and applies for the current FBT year.

What counts as “living expenses” under this cap? Essentially, almost any personal expense you already pay:

• Mortgage repayments or rent payments
• Credit card bills
• Personal loan repayments
• Car registration and insurance
• Utility bills (gas, electricity, water)
• School fees
• Groceries and everyday household costs

That’s right — you can have your employer pay your rent or mortgage directly from your pre-tax salary, completely free of FBT. This is an enormous concession that is simply not available to most Australians outside of the PBI sector.

The $2,650 Meal Entertainment Cap

On top of the $9,010 living expenses cap, public hospital nurses can salary package an additional $2,650 per year in meal entertainment expenses — things like restaurant meals and café expenses. This is a separate cap and does not reduce your $9,010 living expenses entitlement.

A Real Numbers Example

Let’s make this concrete. Consider a nurse earning $85,000 per year at a public hospital in Australia. By salary packaging the full $9,010 in living expenses, their taxable income drops to approximately $75,990.

At the 32.5% marginal income tax rate, that single move saves approximately $2,927 in income tax per year. If they also salary package the full $2,650 in meal entertainment, that’s an additional tax saving of around $861.

Total potential annual tax saving: approximately $3,788 — just from these two benefits alone.

That’s nearly $4,000 per year back in your pocket, every single year, for the rest of your nursing career — simply by filling out a form with your payroll team.

Important: This Is Not Available at Private Hospitals

It’s critical to understand that this FBT exemption is tied to your employer’s PBI status — not to you personally as a nurse. If you move from a public hospital to a private hospital, you lose access to this concession entirely. Private hospitals are generally not classified as PBIs, so their employees are subject to standard FBT rules. The $9,010 and $2,650 caps simply do not apply.

Some private sector aged care providers and certain charities are classified as PBIs — so if you work in those settings, it’s worth checking your employer’s status with your HR or payroll team. When in doubt, ask.

Super Salary Sacrifice — Available to All Nurses

Super salary sacrifice is available regardless of whether you work at a public or private hospital. It works by making additional concessional (pre-tax) contributions to your superannuation fund, reducing your taxable income in the process.

Here’s why it’s powerful:

• Contributions into super are taxed at just 15% inside the fund
• Compare that to your marginal income tax rate of 32.5% to 45% depending on your income
• The difference is pure tax saving

For the 2025-26 financial year, the concessional contributions cap is $30,000 per year. This cap includes your employer’s compulsory Super Guarantee (SGC) contributions of 11.5%, so the amount you can contribute personally will depend on what your employer puts in.

There’s also a carry-forward provision. If your total super balance is under $500,000 and you haven’t maxed out your concessional cap in previous years, you may be able to carry forward unused cap amounts and make larger contributions this year. This can be especially useful if you’ve had time out of the workforce or worked part-time.

Super salary sacrifice is particularly worth considering for nurses who are:

• In their 40s or 50s and wanting to accelerate their retirement savings
• In higher-income brackets (earning over $120,000) where the income tax saving is significant
• Looking to reduce assessable income before an important financial decision (like a property settlement)

You can read more about concessional contributions limits on the ATO website.

Novated Car Leases for Nurses

A novated lease is a three-way arrangement between you, your employer, and a finance company that allows you to lease a vehicle using pre-tax salary. Most public hospitals and major health networks offer novated leasing as part of their salary packaging program.

The tax benefit comes from the fact that your car repayments — including fuel, registration, insurance, tyres, and servicing — are all paid from pre-tax dollars. You also save GST on the purchase price and running costs.

For public hospital nurses, novated leases can be structured within or alongside the $9,010 FBT cap depending on how your salary packaging provider sets it up. Private hospital nurses can still access novated leases, but standard FBT rules will apply on the private use component.

Novated leases work best for nurses who:

• Drive significant distances — to and from work, between sites, or for work-related travel
• Are in the market for a new vehicle anyway
• Can commit to a 2-5 year lease term

Before entering a novated lease, it’s worth having an accountant review the numbers to make sure it stacks up for your situation. The savings are real, but so are the obligations.

Portable Electronic Devices and Laptops

Nurses can also salary sacrifice portable electronic devices that are primarily used for work purposes. This includes:

• Laptops and tablets (for clinical documentation, research, or continuing education)
• Smartphones (used for work communications and clinical apps)

These items are exempt from FBT if they’re primarily for work use, and you can package one device per category per FBT year. This means you could package both a laptop and a smartphone in the same year as separate exempt items.

For nurses who use their own devices for accessing clinical systems, patient management apps, or professional development, this concession can save several hundred dollars per year. See your employer’s salary packaging guide or speak with Pinnacle to understand how this applies in your situation.

Private vs Public Hospital — What’s the Difference?

This comparison is so important it deserves its own section. Here’s a clear breakdown:

Public hospital nurses (PBI employees):

• Super salary sacrifice
• Novated car lease
• Portable electronic devices
• $9,010 per year in living expenses, completely FBT-free
• $2,650 per year in meal entertainment, FBT-free

Private hospital nurses:

• Super salary sacrifice
• Novated car lease (with FBT on private use)
• Portable electronic devices
• No access to the $9,010 living expenses or $2,650 meal entertainment FBT exemptions

The gap in value is significant. A public hospital nurse can access close to $4,000 per year in tax savings that a private hospital nurse simply cannot access. If you’re considering a move between sectors, it’s worth factoring this in — a slightly lower salary at a public hospital could still leave you better off after accounting for the additional salary packaging benefits.

Some private sector aged care providers and charities may also be classified as PBIs. If you work in aged care or the not-for-profit sector, it’s worth checking your employer’s FBT status with HR or payroll before assuming you don’t have access to these concessions.

How to Get Started with Salary Packaging at Your Hospital

The process is more straightforward than most nurses expect. Here’s what to do:

1. Contact your payroll or HR department. Ask whether your employer offers salary packaging and which benefits are available.
2. Find out which salary packaging administrator your hospital uses. Most major public hospitals use specialist administrators such as McMillan Shakespeare, RemServ, or SmartSalary. They handle all the paperwork and can explain your options.
3. Set up your packaging elections. You’ll nominate which benefits you want to package (living expenses, meal entertainment, etc.) and the amounts. Most administrators have online portals where you can do this.
4. Review annually. Your circumstances change — so should your salary packaging strategy. Don’t set and forget. Review your elections at least once a year, especially if your income, family situation, or employer changes.

You don’t need an accountant to set up salary packaging through your employer’s approved administrator. But a tax adviser can help you optimise the strategy — particularly around balancing living expenses packaging with super contributions, or understanding the interaction between salary packaging and your tax return.

At Pinnacle, we work with nurses and healthcare professionals to build a tax strategy that makes the most of every concession available to them. Our tax planning service includes a review of your salary packaging elections as part of a broader strategy.

Common Mistakes Nurses Make with Salary Sacrifice

After working with healthcare professionals on their tax strategies, I see the same mistakes come up repeatedly:

1. Not using the full cap. Many nurses only package a portion of the $9,010 living expenses cap, leaving the rest unused. Every dollar of unused cap is a missed tax saving.
2. Not packaging super in high-income years. If you’re earning overtime, working double shifts, or receiving a significant pay rise, that’s often the best year to maximise your super contributions and bring your taxable income down.
3. Forgetting to update when changing jobs. If you move from a public hospital to a private one, you lose your PBI status immediately. Your salary packaging needs to be reviewed and restructured.
4. Not keeping records of how benefits are used. Your salary packaging administrator tracks most things, but you should keep your own records — especially for meal entertainment claims.
5. Assuming it’s too complicated. Many nurses assume salary sacrifice involves complex forms and ongoing admin. In practice, the administrator does most of the work. A single setup conversation can unlock years of tax savings.

Frequently Asked Questions

Am I eligible for the FBT exemption as a nurse?

Eligibility depends on your employer, not your profession. If you work for a public hospital or another organisation classified as a Public Benevolent Institution, you have access to the $9,010 living expenses and $2,650 meal entertainment FBT exemptions. If you work for a private hospital or a non-PBI employer, these specific exemptions do not apply — though you can still salary sacrifice super and a novated car lease.

Can I salary sacrifice at a private hospital?

Yes, but your options are more limited than at a public hospital. Private hospital nurses can still salary sacrifice into super and access a novated car lease, but they do not have access to the FBT-free living expenses and meal entertainment caps available to PBI employees. Standard FBT rules apply, which significantly reduces the tax benefit of packaging general living expenses.

What is the maximum I can salary package tax-free as a public hospital nurse?

For the current FBT year, public hospital nurses can package up to $9,010 per year in living expenses and an additional $2,650 per year in meal entertainment, both completely free of Fringe Benefits Tax. On top of this, you can contribute up to the concessional super cap of $30,000 per year (including your employer’s SGC contributions). These figures are set by the ATO and may change from year to year.

Does salary sacrifice affect my home loan borrowing capacity?

This is worth checking with your mortgage broker before making changes. Salary sacrifice reduces your gross income as reported to lenders, which can affect your assessed borrowing capacity. Some lenders “gross up” the packaged amount and treat it as income — but not all do. If you’re planning to apply for a home loan in the next 12 months, discuss the timing of your salary sacrifice elections with your broker and accountant beforehand.

Should I salary sacrifice super or living expenses?

For public hospital nurses with access to the FBT exemption, the living expenses and meal entertainment caps are usually the highest priority — they’re dollar-for-dollar savings with no FBT cost. Super salary sacrifice is a great next step, especially if you’re approaching retirement or in a high marginal tax bracket. The right answer depends on your individual circumstances, which is where a personalised consultation with a tax adviser can make a real difference.

Ready to Review Your Salary Sacrifice Strategy?

If you’re a nurse and you haven’t fully explored your salary packaging options, there’s a good chance you’re paying more tax than you need to. The FBT exemption alone can be worth close to $4,000 per year — and that’s before we look at super, novated leases, or other strategies.

At Pinnacle Accounting & Advisory, Mina Baselyous works with nurses and healthcare professionals to build tax strategies that are practical, compliant, and tailored to their actual situation. Book a Consultation and let’s work out exactly what you could be saving.

Book a Consultation →

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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Nurses Are Among Australia’s Most Overworked — and Undertaxed — Professionals

If you’re a registered nurse, enrolled nurse, midwife, or nursing student in Australia, there’s a good chance you’re leaving money on the table every time you lodge your tax return. Nurses are on the front line of Australia’s healthcare system — working long shifts, buying their own equipment, paying out of pocket for registration fees and continuing education, and travelling between hospitals or clinics. Many of those costs are deductible. Most nurses don’t claim all of them.

This guide walks through every major nurse tax deduction available under Australian law for the 2025-26 financial year. I’m Mina Baselyous — CPA and Chartered Tax Adviser at Pinnacle Accounting & Advisory in Melbourne — and I’ve helped many healthcare professionals maximise their refunds by understanding exactly what the ATO allows and what it doesn’t.

Whether you work in a public hospital, a private clinic, an aged care facility, or through a nursing agency, this guide has you covered.

What Counts as a Tax Deduction?

Before diving into the specifics, it helps to understand the ATO’s three golden rules for deductions. An expense is deductible if:

• You incurred it in earning your income — there’s a direct connection between the expense and your work as a nurse.
• It’s not private or domestic — personal expenses (groceries, gym, haircuts) don’t count, even if they indirectly help you perform your job.
• You haven’t been reimbursed — if your employer paid for it, you can’t also claim it as a deduction.

You must also keep adequate records — generally receipts or bank statements — for any claim over $300, and you need a record of all claims regardless of amount.

For full ATO guidance, see the ATO’s deductions page.

Uniforms and Protective Clothing

This is one of the most commonly misunderstood deductions for nurses. You can claim:

• Compulsory uniforms — scrubs or nursing attire that are specific to your employer (e.g., have a logo, required colour scheme, or are stipulated in your employment agreement). If your employer says “wear these blue scrubs with our logo,” that’s deductible.
• Protective footwear — non-slip nursing shoes or steel-capped boots required for your ward or operating environment.
• Compression stockings — if they’re medically required for your role (e.g., long shifts in surgical units), these may be claimable as protective clothing.
• Laundry costs — $1 per load for work-related clothing (up to $150 without receipts). If you’re washing scrubs separately from personal clothing, track the loads. Over $150, you’ll need receipts.

You cannot claim plain clothing you choose to wear to work — even if it’s all black and you only wear it for nursing shifts. If it’s not specific to your employer and could be worn on the street, the ATO says no.

AHPRA Registration and Professional Memberships

Registered nurses in Australia must maintain their registration with the Australian Health Practitioner Regulation Agency (AHPRA). The annual AHPRA registration renewal fee is 100% tax deductible because it’s a direct requirement for you to practise as a nurse.

Other deductible memberships and registrations include:

• Australian Nursing and Midwifery Federation (ANMF) union fees — fully deductible as a work-related expense
• Australian College of Nursing (ACN) membership fees
• Specialty college fees — such as ACORN (perioperative nurses), ACEM (emergency), ACCCN (critical care), or any other specialty professional body you belong to
• Professional indemnity insurance — if you pay this personally (rather than through your employer), it is fully deductible

Keep the annual renewal notices and membership invoices — they’re straightforward to claim and add up quickly.

Professional Development and Self-Education

Nurses are required to complete Continuing Professional Development (CPD) each year to maintain AHPRA registration. That requirement creates a direct link to deductibility. You can claim:

• CPD course fees and registration costs
• Conferences and seminars — including travel and accommodation to attend (see car travel section)
• Textbooks and study materials directly related to your current nursing work
• Journal subscriptions — nursing or medical journals relevant to your specialty
• Internet usage for study — the work-related proportion of your home internet connection

One important distinction: self-education expenses are deductible only if the study is connected to your current job, not if you’re studying to enter a completely new career. For example:

• A registered nurse studying for a Graduate Certificate in Intensive Care Nursing — deductible (directly connected to current nursing work)
• A hospital cleaner studying to become a nurse — not deductible (qualifying for new employment)
• An enrolled nurse studying to become a registered nurse — this is a grey area, and we’d recommend getting specific advice from a registered tax agent like Pinnacle before claiming

If you’re unsure whether your course qualifies, reach out to our team for tailored advice before lodgement.

Work-Related Car Travel

Car travel is one of the larger deductions available to nurses — but there are strict rules about what qualifies. The ATO is very clear: your regular commute from home to your usual place of work is not deductible.

What you can claim:

• Travel between two workplaces on the same day — e.g., leaving your main hospital and driving to a clinic or aged care facility for an agency shift
• Travel to CPD training or conferences where the venue is not your regular workplace
• Travel for community or home visits — district nurses and community health nurses who travel between patient homes during a shift can claim this travel
• Travel to pick up or deliver equipment or supplies for your employer

There are two methods for calculating car deductions:

• Cents per kilometre: 88 cents per km for 2024-25; 92 cents per km for 2025-26. You can claim up to 5,000 km per year without a logbook. Keep a diary or app record showing each journey, purpose, and distance.
• Logbook method: If your work-related driving exceeds 5,000 km per year, a logbook can give a higher deduction. Maintain the logbook for at least 12 continuous weeks to establish your business-use percentage.

Agency nurses who work across multiple hospitals in a week often have substantial car deduction entitlements — it’s worth tracking carefully.

Tools and Equipment

Any tools or equipment you purchase for work that your employer does not provide are deductible. Common examples for nurses include:

• Stethoscope
• Blood pressure cuff
• Nursing watch (fob watch)
• Medical scissors and forceps
• Penlight torch
• Pulse oximeter
• Drug reference guides or apps (paid subscriptions)

The rule is straightforward:

• Items costing $300 or less can be fully deducted in the year of purchase
• Items costing over $300 must be depreciated over their effective life (e.g., a high-end stethoscope costing $500 would be claimed over several years)

If you use the item partly for work and partly personally, you can only claim the work-related portion. Keep the receipt and note the percentage of work use.

Phone and Internet

Most nurses use their personal phone for work — checking rosters, communicating with ward staff, accessing medication reference apps, or reviewing patient handover notes. The work-related portion of your phone and internet bill is deductible.

The ATO recommends keeping a usage diary for four consecutive weeks to establish the percentage of work versus personal use. That percentage then applies to your annual bill.

For most nurses, the work-related proportion sits somewhere between 25% and 50%, depending on your role. A nurse coordinator or team leader who uses their phone heavily for rostering and communication may have a higher percentage than a bedside nurse with limited phone use during shifts.

Home Office Expenses

For many nurses, this deduction won’t apply — you can’t claim a home office deduction just because you look at your roster or occasionally send a work email from home.

However, if you genuinely work from home — for example, you do documentation, clinical charting, or education in a dedicated home workspace — you can claim a deduction using the fixed rate method: 70 cents per hour for every hour you work from home. This covers electricity, internet, and stationery used while working from home.

To claim this, you must:

• Keep a record of the actual hours you work from home (a diary or calendar entries)
• Have a genuine work-from-home arrangement — not just occasional tasks

Nurse educators, clinical nurse consultants, and nurses who complete significant documentation at home are the most likely to qualify.

Union Fees and Professional Subscriptions

Union fees are one of the most straightforward nurse tax deductions. If you’re a member of the Australian Nursing and Midwifery Federation (ANMF) or any other union, those fees are fully tax deductible.

Professional subscriptions that are relevant to your nursing work are also deductible — including:

• Medical and nursing journal subscriptions
• Clinical app subscriptions (e.g., AMH, MIMS, Epocrates) used for patient care
• Online CPD platform subscriptions

If you’re not sure whether a subscription qualifies, the key question is: “Do I need this to do my job?” If the answer is yes, it’s likely deductible.

What Nurses Cannot Claim

Just as important as knowing what to claim is knowing what not to claim. The ATO audits healthcare workers regularly, and incorrect deductions attract penalties.

Nurses cannot claim:

• Ordinary clothing — even if you only wear it for nursing shifts. Scrubs without a logo that could be worn outside work are not deductible.
• Grooming and personal care — haircuts, skincare products, manicures, or perfume, even if you present professionally at work.
• Home-to-work travel — your commute is a private expense regardless of how far you live from the hospital.
• Meals and snacks — food eaten during your shift is not deductible unless you’re on an overnight trip away from your regular workplace.
• Gym memberships or fitness costs — even if fitness is important for the physical demands of nursing.
• Personal use portion of phone or internet — only the work-related percentage is deductible.
• Parking at your usual workplace — parking fees paid at your regular hospital are not deductible (unlike parking at a second workplace or for CPD travel).

Record-Keeping Tips for Nurses

Good record-keeping is the difference between a confident tax claim and a stressful ATO audit. Here’s what I recommend to every healthcare professional I work with:

• Download the ATO myDeductions app — it’s free and lets you photograph receipts, record car trips, and track deductions throughout the year instead of scrambling at tax time.
• Keep all receipts for items over $300 and anything you plan to claim. Even for items under $300, having a receipt makes your claim bulletproof.
• Keep a car logbook or travel diary — record each work-related journey with date, start and end destination, purpose, and distance.
• Run a four-week phone usage diary at some point during the year — this establishes your work-use percentage for the full year.
• Save your AHPRA renewal invoice and all membership receipts — these are easy to forget but add up to several hundred dollars a year.
• Note any work clothing purchases at the time of purchase — don’t rely on memory months later.

The ATO requires you to keep records for five years from the date you lodge your tax return. Digital storage (photos or PDF scans) is acceptable.

The Bottom Line: Get Every Dollar You’re Entitled To

Nurses dedicate their careers to caring for others. The last thing you should have to worry about is whether you’re maximising your tax return. With AHPRA fees, CPD requirements, professional memberships, equipment costs, and work-related travel, a well-prepared nurse tax return can include thousands of dollars in legitimate deductions.

The challenge is that the ATO’s rules are specific — and getting them wrong in either direction (claiming too little or claiming incorrectly) costs you money. Working with a registered tax agent who understands the healthcare sector means your return is lodged correctly, compliantly, and with every deduction you’re entitled to.

At Pinnacle Accounting & Advisory, we work with nurses, midwives, and allied health professionals across Melbourne and Australia-wide. Our tax planning service is designed to help you keep more of what you earn — not just at tax time, but throughout the year.

Ready to get started? Book a Consultation with our team and let’s make sure your next tax return is the best one yet.

Frequently Asked Questions — Nurse Tax Deductions Australia

Can I claim my AHPRA registration fee?

Yes — the annual AHPRA registration renewal fee is 100% tax deductible for registered nurses and midwives. It’s a mandatory requirement to practise, which makes the connection to earning income direct and clear. Keep your renewal invoice as your receipt.

Are nursing scrubs tax deductible?

Only if they are a compulsory uniform specific to your employer — for example, scrubs with your hospital’s logo, or a specific colour mandated by your workplace policy. Generic scrubs without identifying features that could be worn outside work are generally not deductible. If in doubt, check your employment agreement or ask your manager for written confirmation that the uniform is compulsory.

Can I claim my nursing degree as a tax deduction?

It depends on your current employment. If you are already working as a nurse and studying a postgraduate qualification directly connected to your current role (e.g., Graduate Certificate in Critical Care Nursing), the course fees are likely deductible. However, if you’re studying to become a nurse for the first time, those costs are not deductible because you’re qualifying for new employment rather than improving your current skills. The ATO is clear on this distinction — always check before claiming.

How much can I claim without receipts?

You can claim up to $300 in total work-related expenses without receipts (except for car expenses, which have their own rules). For laundry of work uniforms specifically, you can claim up to $150 without receipts using the ATO’s rate of $1 per load. For any amount over these thresholds, receipts or bank statements are required.

Can agency nurses claim travel to different hospitals?

Yes — this is one of the strongest deductions available to agency nurses. Travel between two workplaces on the same day is deductible. If you leave your regular base or home between shifts and travel to a different hospital for an agency placement, that travel is claimable. The key is that you’re travelling between places of work, not commuting from home to a single regular workplace. Agency nurses who work across multiple sites should keep a detailed travel diary throughout the year.

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General Advice Warning: The information on this page is general in nature and does not constitute personal financial, tax or legal advice. Tax laws change regularly and your individual circumstances will affect what deductions you can claim. Always seek tailored professional advice from a registered tax agent before acting on anything you read here.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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A testamentary trust is a trust created through a person’s will that comes into effect after they die. It holds assets for beneficiaries and offers significant tax advantages, particularly for minor children who can be taxed at adult rates on trust income, along with asset protection and control over how the inheritance is used.

This guide is part of our complete guide to trusts in Australia.

Most Australians have a will. But having a will and having a will that actually protects your family’s wealth are two very different things. A will that simply divides your estate between your beneficiaries — however well-intentioned — leaves that wealth exposed to tax, creditors, relationship breakdowns, and poor financial decisions the moment it changes hands.

A testamentary trust changes that. It is the estate planning structure that wealthier families have relied on for decades, and one that remains vastly underutilised by everyday Australians who could benefit most from it.

In this guide, we explain exactly what a testamentary trust is, how it works, and why it may be the most important estate planning decision you make for your family.

What Is a Testamentary Trust?

A testamentary trust is a legal trust created by the terms of your will that comes into existence only upon your death. Unlike a family trust (also called an inter vivos trust or living trust), which you establish and control during your lifetime, a testamentary trust does not exist while you are alive — it is created by your will and activated when your estate is administered.

The trust is established through a specific clause in your will — the trust deed — that sets out who the trustee is, who the beneficiaries are, and how the assets should be managed and distributed. When you die, instead of your estate passing directly to your beneficiaries, it passes into the testamentary trust. The trustee then manages those assets on behalf of the beneficiaries according to the terms you specified.

You can have a single testamentary trust covering all beneficiaries, or separate trusts for each child or family group. Most estate planning advisers recommend a separate trust for each branch of the family to maximise flexibility and protection.

How Does a Testamentary Trust Work?

The mechanics are straightforward. When you die, your estate is first administered through probate — the legal process of validating your will. Once probate is granted, instead of the assets being distributed directly to your beneficiaries, they flow into the testamentary trust. The trustee takes legal ownership of those assets and manages them for the benefit of the beneficiaries.

In a discretionary testamentary trust, the trustee has full discretion to distribute income and capital to any beneficiaries within the trust’s defined class, in any proportions, at any time. This flexibility is central to the trust’s tax efficiency.

A simple example illustrates the difference:

Imagine a parent dies leaving an $800,000 estate to their three adult children. Under a simple will, each child receives approximately $267,000 directly. That money becomes part of their personal wealth — taxed in their name, accessible to their creditors, at risk in any relationship breakdown.

Under a testamentary trust, the $800,000 flows into a trust managed by a trustee. The trustee invests the assets and each year distributes income — say, 5% returns generating $40,000 — across the family group in the most tax-effective way. The trustee can distribute to adult children, their spouses, and importantly, their minor children (grandchildren of the deceased), splitting income across multiple tax-free thresholds. None of the capital is immediately at risk from any single beneficiary’s personal circumstances.

The Tax Advantage That Makes Testamentary Trusts Exceptional

The most significant benefit of a testamentary trust — the one that separates it from every other estate planning structure — is how minor beneficiaries (children under 18) are taxed on distributions.

Under Division 6AA of the Income Tax Assessment Act 1936, income distributed to minor children from living trusts (such as family trusts or discretionary trusts established during your lifetime) is taxed at punitive penalty rates. A child receiving $18,200 from a family trust pays tax at the top marginal rate on amounts over $416 — resulting in an effective tax rate approaching 66% on that income. This is commonly called the kiddie tax.

However, under section 102AG of the Income Tax Assessment Act 1936, income distributed to minors from a testamentary trust is treated differently. It is taxed at ordinary adult marginal tax rates — not the penalty rates.

This means a 10-year-old grandchild receiving $18,200 in income distributions from a testamentary trust pays zero tax — that amount sits precisely at the tax-free threshold for an adult. The same child receiving $18,200 from a family trust would face a tax bill of approximately $12,000.

For a family with multiple minor grandchildren, this difference compounds significantly year after year. It is the primary reason that high-net-worth families and business owners structure their estates around testamentary trusts rather than simple direct inheritances. The ATO provides guidance on deceased estates and testamentary trusts and how income distributions are assessed.

Other Key Benefits of a Testamentary Trust

Tax efficiency for minor beneficiaries is the headline benefit, but testamentary trusts offer a range of protections that make them valuable for almost any estate above $500,000.

Asset Protection from Creditors

Assets held in a testamentary trust are legally owned by the trust, not the individual beneficiary. This means those assets are generally protected from the beneficiary’s creditors — whether arising from a business failure, personal bankruptcy, or a court judgment. If a beneficiary faces financial difficulty, the trustee can suspend or redirect distributions until the risk passes. The trust assets remain intact and out of reach.

Protection in Relationship Breakdown

Under Australian family law, trust assets can be treated differently to personal assets in property settlements. Assets held in a testamentary trust — particularly where the beneficiary does not have direct control over distributions — may receive a degree of protection from a separating spouse’s claims, compared to assets received directly as an inheritance. Speak with your legal adviser about how this applies to your specific circumstances.

Flexibility for Changing Circumstances

Life changes. A simple will cannot account for changes in a beneficiary’s tax situation, financial needs, or personal circumstances that happen years after your death. A testamentary trust gives the trustee ongoing discretion to adjust distributions as circumstances evolve — directing more income to a beneficiary who needs it, or less to one who is already in a high tax bracket.

Control and Conditions

As the will-maker, you can set conditions on how and when capital is accessed. For example, you might specify that a beneficiary cannot access trust capital until they turn 25, ensuring that young adults have time to mature before receiving a significant inheritance. This level of control is impossible with a simple direct inheritance.

Blended Family Protection

For those in second marriages or blended families, a testamentary trust provides a mechanism to ensure assets ultimately reach your intended beneficiaries — your children from a previous relationship — rather than passing to a surviving spouse who may later remarry or leave the estate to unintended parties.

Testamentary Trust vs Family Trust — What Is the Difference?

Many Melbourne business owners already have a family trust and wonder how a testamentary trust relates to it. They serve different purposes and are not interchangeable. For a broader overview of all Australian business structures — including how family trusts, companies, and multi-entity setups compare — see our complete guide to business structures in Australia.

Feature	Testamentary Trust	Family Trust (Discretionary)
When created	On the will-maker’s death	During the person’s lifetime
How funded	Assets from the deceased estate	Any assets transferred into the trust
Tax on minors	Adult marginal rates (including tax-free threshold)	Penalty rates under Division 6AA
Asset protection	Strong — assets are not owned personally by beneficiaries	Moderate — depends on structure
Probate required	Yes — estate must go through probate first	No — assets already held in trust
Control by creator	Set in the will — fixed at death	Active control during lifetime

The critical difference is the tax treatment of minor beneficiaries. A family trust cannot offer the same tax efficiency for distributions to children under 18 — only a testamentary trust qualifies for adult marginal rates under section 102AG. Many families use both structures: a family trust for business and investment assets during their lifetime, and a testamentary trust in their will to protect and distribute their estate after death. These two structures are complementary, not alternatives.

For a deeper look at how family trusts work during your lifetime, read our guide on how to set up a family trust in Australia and how family trust distributions are taxed.

Who Should Consider a Testamentary Trust?

The straightforward answer is: anyone with an estate worth protecting. The following situations make a testamentary trust particularly valuable:

• Business owners with significant assets — property, business equity, or investments — who want to protect that wealth for the next generation
• Parents of minor children who want their children to receive income at tax-effective rates rather than at penalty rates
• Parents of children with disabilities who need ongoing, managed financial support without losing access to government entitlements — a protective testamentary trust can be structured specifically for this purpose
• People in blended families who want to ensure their assets reach their biological children rather than a new partner’s estate
• Anyone with a combined estate above $500,000 — the tax savings on distributions to minor beneficiaries alone can offset the cost of the structure within a few years
• People with concerns about a beneficiary’s financial responsibility — whether due to addiction, poor money management, or relationship instability — where a direct inheritance could be quickly dissipated

If you are a Melbourne business owner working with an accountant in Melbourne on your business structure, your estate plan should be part of the same conversation. What you build during your lifetime needs to be protected after it.

How to Set Up a Testamentary Trust

A testamentary trust must be established correctly to be effective. It is not a form you fill in — it requires coordinated legal and accounting input from the start.

Step 1 — Get professional legal and accounting advice. A testamentary trust involves both legal drafting (your will) and tax planning (the trust structure). Your solicitor and your accountant need to work together from the outset. A will drafted without tax input may miss critical opportunities; tax advice without legal implementation produces nothing.

Step 2 — Identify the assets to flow into the trust. Decide which assets will pass through your estate and therefore into the testamentary trust, and which are better held elsewhere. Superannuation, for example, passes outside the estate via a binding death benefit nomination and is not automatically covered by the trust.

Step 3 — Draft the trust deed as part of the will. Your solicitor drafts the testamentary trust provisions into your will. The deed specifies the terms — how the trustee operates, who the beneficiaries are, and any conditions or limitations you want to impose.

Step 4 — Name the trustee. The trustee is the person or entity responsible for managing the trust assets after your death. This is commonly a surviving spouse, an adult child, or a professional independent trustee. Always name a successor trustee in case your first choice cannot or will not act.

Step 5 — Define the beneficiary class. Specify who can benefit from the trust — typically your children, grandchildren, their spouses, and future descendants. A broad beneficiary class gives the trustee maximum flexibility to distribute income in the most tax-effective way.

Step 6 — Review the will and trust every three to five years. Your family circumstances, asset base, and the tax laws change. A testamentary trust set up in 2020 may need updating by 2025. Regular reviews with your accountant and solicitor ensure the structure remains optimal.

For more on structuring your affairs tax-efficiently, explore our tax planning services for Melbourne business owners.

Common Mistakes to Avoid

The most expensive estate planning mistake is not making one — it is making the wrong one and not realising until it is too late to correct.

Leaving children as direct beneficiaries in a simple will. This is the default for most Australians. It is also the most costly — income tax, creditor exposure, and relationship risk are all avoidable with the right structure in place.

Not nominating a successor trustee. If your named trustee dies, becomes incapacitated, or refuses to act, and you have no successor nominated, a court may need to appoint one. This delays administration, adds cost, and removes your control over who manages the trust.

Failing to account for superannuation. Superannuation does not form part of your estate and is not covered by your will. To direct your super to specific beneficiaries, you need a valid, current binding death benefit nomination (BDBN) with your fund. Without one, your super trustee has discretion over who receives your benefit — which may not align with your intentions. The ATO provides guidance on death benefit nominations for superannuation members.

Setting it up once and never reviewing it. Tax laws change. Your family changes. Your assets change. A testamentary trust drafted in isolation from your ongoing financial planning quickly becomes outdated. Treat it as a living part of your financial structure, not a set-and-forget document.

Frequently Asked Questions

Does a testamentary trust avoid probate?

No. A testamentary trust is created by your will, so the estate must still go through probate before assets can flow into the trust. Probate validates the will and grants the executor legal authority to deal with the estate. Only after probate is granted can the executor transfer assets into the testamentary trust. If avoiding probate is a priority, holding assets in a family trust or directing superannuation via a binding death benefit nomination during your lifetime achieves that goal — but the testamentary trust itself requires probate as a first step.

Can I have both a family trust and a testamentary trust?

Yes, and many Melbourne business owners do. A family trust holds and manages assets during your lifetime, while the testamentary trust in your will governs what happens to your estate after you die. The two structures serve different functions and complement each other well. Assets already held in a family trust at the time of your death do not automatically flow into the testamentary trust — only assets that form part of your personal estate at death will do so.

What happens to my SMSF — is it covered by my will?

No. Your self-managed superannuation fund (SMSF) is not covered by your will and does not automatically flow into a testamentary trust. Superannuation passes outside your estate and is governed by your SMSF’s trust deed and any binding death benefit nomination you have in place. To ensure your super reaches the beneficiaries you intend, you must have a valid, current BDBN with your fund. Speak to your accountant about reviewing your SMSF’s death benefit arrangements as part of your broader estate plan.

Who can be trustee of a testamentary trust?

Almost anyone you trust who has legal capacity to act. Commonly, the trustee is the surviving spouse, an adult child, or a professional trustee such as a solicitor or a trustee company. The trustee carries significant responsibility — managing investments, making distribution decisions, filing annual tax returns for the trust, and acting in the best interests of all beneficiaries. Choose someone with sound judgement and financial literacy, or consider a professional trustee where conflicts of interest between family members are a concern.

How much does it cost to set up a testamentary trust?

A will containing testamentary trust provisions typically costs between $1,500 and $3,500 in legal fees, depending on the complexity of your estate and the number of trusts involved. Once active, the trust requires annual tax returns and ongoing trustee management, which add to the administrative cost. However, the tax savings on distributions to minor beneficiaries alone can recover the setup cost within one to two years for a modest estate generating reasonable investment returns. The cost of not having one is almost always greater over time.

Can I change a testamentary trust after I set it up?

Yes — while you are alive. Because the testamentary trust exists within your will, you can amend or revoke it at any time by updating your will through a codicil or a new will entirely. Once you die, the trust terms are fixed and the trustee must act within the powers granted by the trust deed. This is why regular reviews during your lifetime are so important — changes in tax law, family structure, or your asset base may all require corresponding updates to the trust’s provisions.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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The Division 7A benchmark interest rate for the 2025-26 income year is 8.37%. This is the minimum interest rate that must be charged on a complying Division 7A loan from a private company to a shareholder or associate, and it is used to calculate the minimum yearly repayment needed to avoid a deemed dividend.

Every private company loan to a shareholder or associate must charge at least the ATO’s Division 7A benchmark interest rate. If the rate is too low — or if no interest is charged at all — the shortfall is treated as a deemed dividend, taxable in the hands of the shareholder at their full marginal rate with no franking credits to offset it.

This post explains what the Division 7A benchmark interest rate is, what the confirmed rate was for the 2025–26 income year, how to apply it to a complying loan, and what the consequences are if you get it wrong. It is a reference post — bookmark it and refer back to it each income year when your Division 7A loan obligations are due.

What Is the ATO Division 7A Benchmark Interest Rate?

The Division 7A benchmark interest rate is the minimum interest rate that must be charged on a complying Division 7A loan. It is set by the ATO at the start of each income year and published at ato.gov.au.

The rate is based on the Reserve Bank of Australia’s (RBA) indicator lending rate for standard variable housing loans, as published by the RBA in its Statistical Tables. The ATO uses the rate published for the last day of the income year that ended before the income year in question — meaning the benchmark rate for 2025–26 is based on the RBA rate published at 30 June 2025.

The benchmark rate serves a practical purpose: it ensures that Division 7A loan arrangements carry a genuine commercial interest cost, rather than being effectively interest-free. An interest-free loan to a shareholder provides a clear economic benefit, and Division 7A is designed to tax that benefit appropriately.

The Division 7A Benchmark Rate for 2025–26

For the 2025–26 income year (1 July 2025 to 30 June 2026), the ATO confirmed the Division 7A benchmark interest rate was:

This rate applies to all complying Division 7A loan agreements where the loan was made during the 2025–26 income year (1 July 2025 to 30 June 2026). If a loan was made in a prior income year, the rate that applies is the benchmark rate from the year the loan was made — not the current rate.

For the current 2026–27 income year, the ATO has confirmed the benchmark interest rate is 8.77% per annum. Any new Division 7A complying loan entered into from 1 July 2026 must charge at least 8.77%.

How the Benchmark Rate Is Determined

The ATO calculates the Division 7A benchmark interest rate using the following process:

1. The ATO identifies the RBA’s Indicator Lending Rates (Statistical Table F5) for standard variable housing loans
2. The rate used is the one applicable on the last day of the previous income year (i.e., 30 June of the income year before the one being assessed)
3. This rate is then applied as the benchmark for the current income year

Because the benchmark rate is linked to the RBA variable rate, it moves in line with interest rate cycles. During the low-rate environment of 2020–22, Division 7A benchmark rates were below 5%. The subsequent RBA rate-hiking cycle pushed the benchmark rate above 8%, which has significantly increased the minimum annual repayment burden for loans entered into from 2023 onwards.

Historical Division 7A Benchmark Interest Rates

The table below shows the Division 7A benchmark interest rate for each income year going back to 2019–20:

Income Year (ended 30 June)	Benchmark Interest Rate
2026–27 (current year)	8.77%
2025–26	8.37%
2024–25	8.77%
2023–24	8.27%
2022–23	4.77%
2021–22	4.52%
2020–21	4.52%
2019–20	5.37%

Always verify the current and historical benchmark rates directly with the ATO at ato.gov.au. The rates in the table above reflect published ATO rates as at the date of writing.

How to Apply the Benchmark Rate to Your Division 7A Loan

The benchmark rate that applies to a Division 7A loan is the rate in the income year the loan was made. Once set, this rate is fixed for the entire life of that loan — regardless of what the benchmark rate is in subsequent years.

Practical examples:

• Loan made in 2025–26: Benchmark rate is 8.37%. This rate applies to every year of the loan term, whether it is a 7-year or 25-year loan.
• Loan made in 2022–23: Benchmark rate was 4.77%. Even though the rate has since risen to 8.37% and 8.77%, that loan still only needs to charge 4.77% per annum.
• Loan made in 2026–27: Benchmark rate is 8.77%. New loans started from 1 July 2026 must charge at least 8.77%.

This “lock-in” feature means that loans made during the low-rate years of 2020–23 carry much lower minimum repayments than loans made at the current elevated rates. If you have an older Div 7A loan with a low historical rate, the minimum repayment requirements are correspondingly lower and more manageable.

When calculating the minimum annual repayment (MAR), you apply the applicable benchmark rate to the opening loan balance each year, combined with the remaining term, to determine the required repayment. The ATO’s online Division 7A calculator handles this automatically. For a worked repayment example, see: Division 7A Loan Repayments: How They Work and What Happens If You Miss Them.

What Happens If You Charge Less Than the Benchmark Rate?

If a Division 7A complying loan charges interest below the applicable benchmark rate, the ATO treats the interest shortfall as an additional deemed dividend. The deemed dividend equals the difference between what interest should have been charged (at the benchmark rate) and what was actually charged.

For example: a loan balance of $200,000 for the 2025–26 year requires interest of at least 8.37% = $16,740. If only 6% interest was charged ($12,000), the shortfall of $4,740 is treated as a deemed dividend in that income year — taxable at the shareholder’s marginal rate, unfranked.

This problem can arise from:

• Using an outdated benchmark rate in a loan agreement (e.g., charging the rate from a prior year when the current year rate applies to a new loan)
• A typo or error in the loan agreement specifying the wrong rate
• Not updating the rate if the loan agreement was incorrectly structured as a “variable rate” arrangement

There is no remedy for a sub-benchmark interest charge after year end. The deemed dividend is assessed in the year the shortfall arose. This is why having a qualified tax adviser prepare and review Division 7A loan agreements — and confirm the applicable benchmark rate each year — is not optional.

For a broader view of the strategies to avoid deemed dividends altogether, read: How to Avoid a Division 7A Deemed Dividend — 5 Strategies That Work. For a comprehensive overview of all Division 7A rules — including complying loan agreements, distributable surplus, trust interactions, and the most common mistakes — see: Division 7A Explained: The Complete Guide for Australian Business Owners. For a detailed breakdown of how Division 7A loans work in practice, see: Division 7A explained: the complete guide.

Frequently Asked Questions

What is the Division 7A benchmark interest rate for 2025–26?

The ATO confirmed the Division 7A benchmark interest rate for the 2025–26 income year (1 July 2025 to 30 June 2026) was 8.37% per annum. This applies to all Division 7A complying loans made during that income year and is fixed for the life of those loans. Confirm the current rate at ato.gov.au.

What is the current Division 7A benchmark interest rate?

For the 2026–27 income year (1 July 2026 to 30 June 2027), the Division 7A benchmark interest rate is 8.77% per annum. Any new Division 7A complying loan entered into on or after 1 July 2026 must charge at least this rate.

Does the benchmark rate change every year?

Yes — the ATO sets the benchmark rate annually, based on the RBA’s indicator lending rate for standard variable housing loans. The rate can increase or decrease year on year. However, once a loan is established under a specific year’s benchmark rate, that rate is locked in for the entire term of that loan. New loans made in a different income year use the benchmark rate applicable to that new year.

What happens if I use the wrong Division 7A interest rate?

If you charge interest below the applicable benchmark rate, the shortfall is treated as a deemed dividend in the hands of the shareholder for that income year — taxable at their marginal rate with no franking credits. There is no mechanism to retrospectively fix a below-benchmark interest charge after year end. Always confirm the applicable rate with your tax adviser before the loan agreement is signed.

Do Division 7A interest payments need to be actually paid in cash?

Yes. The minimum annual repayment (which includes both principal and interest) must be paid in cash — not merely journalled or accrued. If the interest is charged in the accounts but not actually paid, the minimum annual repayment has not been met and a deemed dividend arises for the shortfall. The ATO requires genuine cash movement to count as a repayment against a Division 7A loan.

The Division 7A benchmark interest rate is one of those details that seems minor until it is wrong — at which point it creates a deemed dividend and an unexpected tax bill. If you are not certain the interest rate on your Div 7A loan is correctly documented and applied, book a review with Pinnacle before your next return is lodged. Contact us today.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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To avoid a Division 7A deemed dividend, any loan from a private company to a shareholder or associate must be either repaid or placed on a complying loan agreement by the company’s lodgement day, with minimum yearly repayments at the benchmark rate (8.37% for 2025-26). Otherwise the amount is taxed as an unfranked dividend.

A Division 7A deemed dividend is one of the most avoidable yet costly tax outcomes a business owner can face. It happens when money leaves your private company and the arrangement does not meet the ATO’s rules — and the result is the full amount being treated as assessable income at your marginal tax rate, with no franking credits to soften the blow.

The good news is that Division 7A is entirely manageable with the right planning. The five strategies in this post are practical, ATO-compliant, and used by Pinnacle Accounting & Advisory to protect Melbourne business owners from deemed dividend exposure every income year.

If you are not yet familiar with what Division 7A is and how a deemed dividend is triggered, start with our complete guide: Division 7A Explained: The Complete Guide for Australian Business Owners. This post assumes you understand the basics and focuses on what to do about it.

What Is a Division 7A Deemed Dividend?

A deemed dividend arises when a private company provides a financial benefit to a shareholder or associate — through a loan, payment, or debt forgiveness — that does not comply with Division 7A. The ATO treats the non-complying amount as though the company paid an unfranked dividend to the shareholder in that income year.

Why is this so damaging?

• It is added to your assessable income — taxed in full that year
• It is unfranked — you receive no franking credits, which means no tax offset
• It is taxed at your marginal rate — up to 47% including the Medicare levy
• It does not come with any actual cash — you have already spent the money, but now you also owe tax on it

Here are five strategies that actually work to avoid this outcome.

Strategy 1: Document a Complying Loan Agreement — Before the Return Is Lodged

How It Works

If your company has lent money to you or an associate, a written complying Division 7A loan agreement converts that arrangement from a deemed dividend risk into a legitimate, manageable loan. The agreement must be in place before the earlier of: the lodgement date of the company’s income tax return for the year the loan was made, or the due date for lodgement of that return.

The agreement must specify: the loan amount, at least the ATO benchmark interest rate, the maximum term (7 years unsecured, 25 years with real property security), and the requirement for minimum annual repayments. Once the agreement is signed and the loan is on complying terms, the deemed dividend risk for that loan is avoided — as long as repayments are met every year.

When to Use It

This strategy applies any time a director’s loan account exists — whether through a formal cash advance, personal expenses paid by the company, or an amount drawn down informally. If money has moved from the company to a shareholder or associate and it was not processed as salary or a declared dividend, a complying loan agreement is almost always the correct immediate step.

Risks If Done Incorrectly

The most common failure point is timing. If the company’s tax return is lodged before the loan agreement is signed, the protection is lost for that income year. Retroactive loan agreements do not work — the ATO requires the agreement to exist before lodgement. Second risk: an agreement that does not meet the technical requirements (e.g., interest rate below the benchmark, or term exceeding the maximum) provides no protection. Have a qualified tax adviser prepare or review any Division 7A loan agreement before it is signed.

Strategy 2: Pay the Benchmark Interest Rate — and Pay It by 30 June

How It Works

Every complying Division 7A loan must charge interest at at least the ATO benchmark interest rate. For the 2025–26 income year, that rate was 8.37% per annum. For 2026–27 (the current year), it is 8.77%. Interest must be charged and paid — not just accrued on paper.

The minimum annual repayment (MAR) combines both interest and principal into a single annual amount. The entire MAR must be paid in cash before 30 June. If only the interest component is paid and the principal portion is missed, the shortfall in the MAR is still a deemed dividend. It is the total MAR that counts, not just the interest.

When to Use It

Every year that a Division 7A loan is outstanding. This is not a one-time step — it is an annual obligation for the life of the loan. Once the loan is on complying terms, tracking and paying the MAR by 30 June every year is what keeps the arrangement compliant.

Risks If Done Incorrectly

Charging interest below the benchmark rate — even by a small margin — is itself a deemed dividend for the interest shortfall. Similarly, paying the correct interest but underpaying the principal component of the MAR creates a deemed dividend for the underpaid portion. Use the ATO’s Division 7A calculator to confirm the exact MAR before payment. Do not rely on a spreadsheet estimate unless it has been reviewed by your accountant.

For a detailed look at how the minimum repayment is calculated and a worked example, see: Division 7A Loan Repayments: How They Work and What Happens If You Miss Them.

Strategy 3: Frank the Dividend If You Are Declaring One

How It Works

Division 7A is designed to prevent shareholders from accessing company profits without paying tax. But if you simply declare a proper dividend from the company to its shareholders — resolved by the board, recorded in minutes, paid out — Division 7A does not apply at all. A formally declared dividend is a legitimate and straightforward way to extract company profits.

Better still, when the company has a positive franking account balance (because it has already paid corporate tax on those profits), declaring a franked dividend passes those franking credits to the shareholder. The shareholder pays tax on the dividend at their marginal rate, but the franking credits reduce the actual tax payable — sometimes to nil if the franking credit offsets the individual’s entire tax liability on that amount.

When to Use It

This strategy is most effective when the company has accumulated profits that have already been taxed at the corporate rate (25% or 30%), creating a franking credit balance. If you want to extract those profits as income, a franked dividend is almost always preferable to leaving the amount as an informal loan — which risks Div 7A — or taking it as salary, which may push you into a higher income bracket.

A franked dividend can also be used strategically to make the Division 7A minimum annual repayment. The company pays you a franked dividend; you apply those funds as repayment against the Div 7A loan. The franking credits partially offset the income tax on the dividend, reducing the effective cost of maintaining the complying loan arrangement.

Risks If Done Incorrectly

A dividend must be properly declared — it cannot be informal. There must be a board resolution, the dividend should be proportional to shareholding (unless you have different share classes), and it needs to be recorded correctly in the company’s accounts. Improperly declared dividends can be challenged, and if the company does not have sufficient distributable profits, paying out a dividend can create further issues. Get your accountant involved before any significant dividend is declared.

Strategy 4: Use a Trust Distribution to the Company Before EOFY, and Manage the Right Risks

How It Works

Many business owners who operate through a family trust distribute income to a private company beneficiary (a “bucket company”) at the end of each income year. The trust resolves before 30 June to distribute income to the company. The company pays tax at 25–30% on that income, and the after-tax profits sit in the company for reinvestment or future use.

The Division 7A analysis here changed in 2026. Where the trust does not actually pay the distribution in cash and the amount stays in the trust, an unpaid present entitlement (UPE) arises. In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court held that a company which simply does nothing about its entitlement does not provide financial accommodation under section 109D(3)(b). A bare UPE is therefore not a loan and does not by itself produce a deemed dividend. The ATO accepted that outcome in its Bendel Decision Impact Statement, published 26 June 2026.

So the strategy is no longer about converting the entitlement into a loan. As at September 2026, it is about keeping three separate risks under control. First, Subdivision EA still bites: if the trust pays money to, lends to, or forgives a debt of a shareholder of the bucket company or their associate while the UPE is outstanding, a deemed dividend can still arise. Second, section 100A still applies to reimbursement agreements, taxing the trustee at the top marginal rate with no time limit. Third, if you have already put a UPE onto complying section 109N loan terms, that is a real loan and stays one. Bendel does not unwind it, and the minimum yearly repayments still have to be made.

When to Use It

Any time your trust distributes income to a private company beneficiary. This needs to be reviewed every income year before 30 June. Trust distribution resolutions are time-critical — they must be made before 30 June each year (or the trust’s earlier resolution date). If the distribution resolution is late, it may not be valid for tax purposes at all.

Risks If Done Incorrectly

The trust and company rules remain among the most complex areas of Division 7A, even with the section 109D question now settled. The exposure has shifted rather than disappeared: money that finds its way from the trust to the shareholders of the bucket company, or to their associates, is exactly what Subdivision EA is aimed at, and a deemed dividend arising there is significantly harder and more expensive to unwind than it is to prevent. If you operate a trust-plus-bucket-company structure, this must be reviewed with a qualified tax adviser before each EOFY. For broader context on how trusts and companies interact, see our guide on the Family Trust vs Bucket Company tax strategy.

Strategy 5: Get Professional Advice Before 30 June — Every Year

Why Timing Matters

The single most effective Division 7A strategy is also the simplest: engage a proactive tax adviser before 30 June each year, not after the return is lodged. Almost every Division 7A problem I see in practice is fixable if we know about it before the return goes in. Almost none of them are easily fixable once the year has ended.

Before 30 June, your adviser can: identify any non-complying loan arrangements, prepare or update loan agreements, calculate correct minimum repayments, review trust distributions and UPE positions, advise on dividend declarations to satisfy repayments, and ensure the company’s lodgement timing does not inadvertently shorten the window for action.

What a Tax Adviser Does at EOFY for Div 7A

At Pinnacle, the Division 7A review before each 30 June typically covers:

• Reviewing all director and shareholder loan accounts against the company balance sheet
• Recalculating minimum annual repayments for all outstanding complying loans
• Reviewing trust distribution resolutions and UPE positions for Subdivision EA and section 100A exposure, and confirming that any UPE already converted to a complying loan is still being serviced
• Advising on the most tax-effective method of making repayments (e.g., cash vs franked dividend offset)
• Identifying any new Div 7A loans created during the year that need to be put on complying terms before the return is lodged
• Confirming the company’s distributable surplus position

None of this can be done retrospectively once the return is lodged. If your current accountant is not proactively raising Division 7A with you before 30 June, ask the question — or consider whether you have the right adviser. See the top Division 7A traps to avoid, the guide on eliminating a Division 7A loan, and the comprehensive Division 7A complete guide for Australian business owners for further reading.

Frequently Asked Questions

Can I avoid Division 7A by repaying the loan before the return is lodged?

Yes — this is one of the cleanest strategies. If a loan from your company is fully repaid before the company’s income tax return is lodged (and before the due date for lodgement), Division 7A is not triggered at all. This is only workable where the amount can genuinely be repaid in cash within that window. It is commonly used for smaller amounts or short-term cash movements between the company and shareholder.

Does my bucket company’s unpaid present entitlement have to go on a Division 7A loan?

No, not any more. Following Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, an unpaid present entitlement that the corporate beneficiary simply leaves outstanding is not a loan under section 109D, so it does not of itself create a deemed dividend. The ATO confirmed this administrative position in its Decision Impact Statement of 26 June 2026. Two qualifications matter. If the entitlement has already been converted into a complying section 109N loan, it remains a loan and repayments must continue. And Subdivision EA and section 100A still apply, so what the trust does with the money afterwards is where the risk now sits.

What is the maximum amount I can borrow from my company under Division 7A?

There is no absolute cap on the loan amount — but any amount borrowed must be on complying loan terms, and the deemed dividend (if the arrangement fails) is capped at the company’s distributable surplus. Distributable surplus is essentially the company’s net assets minus paid-up share capital and franking account surplus. Borrowing an amount greater than the distributable surplus does not eliminate the Div 7A risk — it just caps the deemed dividend at the distributable surplus figure for that year.

Can I avoid Division 7A through the use of a salary sacrifice arrangement?

Salary and wages paid to a shareholder who is also an employee are outside Division 7A — they are deductible for the company and taxable as income for the employee. However, there is no mechanism to retroactively reclassify an existing director’s loan as salary. Salary must be paid as salary, not after the fact. If your loan account has grown because you have been taking living expenses from the company instead of paying yourself a salary, that needs to be restructured going forward — not papered over retrospectively.

Does paying a franked dividend to repay a Division 7A loan create a taxable event?

Yes — the dividend itself is taxable income, but it comes with franking credits that offset some or all of the tax liability. Whether this is more or less tax-effective than other approaches depends on your marginal tax rate, the franking credit balance in the company, and the size of the loan. In many cases, a franked dividend repayment is the most tax-efficient way to satisfy the minimum annual repayment obligation. Model this with your accountant before committing.

What is the ATO benchmark interest rate for 2025–26?

The Division 7A benchmark interest rate for the 2025–26 income year was 8.37% per annum. For the current 2026–27 income year, the rate is 8.77%. Check the ATO’s website at ato.gov.au for current rates. For a full breakdown of historical rates, see: Division 7A Interest Rate 2025–26 — What Business Owners Need to Know.

None of the five strategies above are difficult — they just require action before the deadline, not after. Division 7A is entirely manageable when it is on your accountant’s radar before 30 June each year. If it is not, that is the first thing to fix. Contact Pinnacle Accounting & Advisory to book a consultation with Mina.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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Division 7A loan repayments must meet a minimum yearly repayment each year, calculated using the ATO benchmark interest rate (8.37% for 2025-26), the loan balance and the remaining loan term. The repayment must be genuinely made by 30 June, or the shortfall can be treated as an unfranked deemed dividend in the borrower’s hands. There is a related trap worth knowing about if you intend to repay and then draw the funds out again, which we cover in borrowing from your company to fund your offset account.

If your private company has lent money to you, a family member, or a connected entity, you have Division 7A loan repayment obligations that need to be met every single year by 30 June — without exception. Miss them, and the ATO treats the shortfall as a new unfranked dividend, taxable at your full marginal rate.

The repayment rules catch many business owners off guard. It is not enough to have a written Division 7A loan agreement in place; you need to make the correct minimum repayment each year, ensure it covers both principal and interest, and do it before the deadline. This post walks through exactly how Division 7A loan repayments work, how to calculate the minimum amount, and what happens when things go wrong.

If you are new to Division 7A, start with our comprehensive guide first: Division 7A Explained: The Complete Guide for Australian Business Owners. This post focuses specifically on the repayment mechanics in detail.

What Constitutes a Division 7A Loan?

A Division 7A loan arises when a private company provides a financial accommodation to a shareholder or their associate. This includes:

• A formal loan of money from the company to the shareholder
• Payments made by the company on behalf of the shareholder (e.g., personal expenses paid from the company account)
• Credit extended by the company to the shareholder — for example, allowing goods or services to be taken without payment
• An amount owed by a trust to a private company that the parties have actively dealt with so as to create a loan, for example by converting an unpaid present entitlement into a section 109N complying loan agreement

Any of these arrangements that is not fully repaid before the company’s tax return lodgement date for that income year must be placed on a complying loan agreement — otherwise the amount is treated as a deemed dividend.

One important qualification, as at September 2026. An unpaid present entitlement (UPE) that a corporate beneficiary simply leaves outstanding is not on this list. In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court held that providing financial accommodation requires some bilateral activity, a transfer or grant of value, and that a company which does nothing about its entitlement provides none. A bare UPE is therefore not a section 109D loan. The ATO accepted this in its Bendel Decision Impact Statement, published 26 June 2026. A UPE that was already converted into a complying loan is a different matter: it remains a loan, and the repayment rules set out below apply to it in full.

For the loan to be a complying Division 7A loan, the written agreement must be in place before the earlier of: the lodgement date of the company’s income tax return, or the due date for lodgement. This timing is non-negotiable. A loan agreement signed after the return is lodged provides no protection for that income year.

Loan Terms: 7 Years vs 25 Years

Every Division 7A complying loan must have a defined maximum term. There are two options:

Unsecured Loans — Maximum 7 Years

An unsecured Division 7A loan can run for a maximum of 7 years from the end of the income year in which the loan was made. For example, a loan made in the 2025–26 income year (ending 30 June 2026) has a maximum term through to 30 June 2033.

A 7-year term means higher minimum annual repayments because you are repaying the full principal and interest over a shorter period. For a $100,000 loan at the 2025–26 benchmark rate of 8.37%, the minimum repayment in Year 1 is approximately $19,022. By Year 7, the loan is fully repaid.

Loans Secured by Real Property — Maximum 25 Years

If the loan is secured by a registered mortgage over real property, the maximum term extends to 25 years. There are important conditions:

• The security must be a registered mortgage over real property (not just a charge over other assets)
• The loan-to-value ratio (LVR) must not exceed 100% at the time the security is granted
• The LVR condition is assessed at the time the security is provided, not at later dates

A 25-year term significantly reduces the minimum annual repayment — for the same $100,000 loan, the minimum repayment drops to approximately $9,215 per year. This makes the secured 25-year loan an attractive option for business owners who need more manageable annual cash outflows. However, it requires real property as security and a properly registered mortgage, which adds legal complexity and cost.

One important point: if the security arrangement is not correctly documented or the mortgage is not registered, the ATO will treat the loan as unsecured — meaning 7-year terms and higher repayments. Any shortfall from what you should have been repaying becomes a deemed dividend.

How the Minimum Annual Repayment Works

Every year that a Division 7A complying loan is outstanding, a minimum annual repayment (MAR) must be made before 30 June. The MAR covers both interest accrued during the year and a portion of principal.

The ATO publishes a formula for calculating the minimum repayment, based on the loan balance, the benchmark interest rate applicable to the loan, and the number of years remaining in the term. The ATO also provides an online Division 7A Calculator and Decision Tool that computes this for you. For a quick estimate, you can also use Pinnacle’s Division 7A loan calculator.

The Formula

The minimum annual repayment is calculated using a standard loan annuity formula:

MAR = Loan Balance × [r ÷ (1 − (1 + r)^(−n))]

Where:

• r = the benchmark interest rate applicable to the loan (as a decimal)
• n = the number of years remaining on the loan at the start of the income year

This is effectively a constant repayment mortgage formula. The repayment amount stays roughly the same each year, but the proportion going to interest decreases as the principal reduces.

Worked Example: Minimum Repayment Calculation

Let’s say a director, Michelle, took a $150,000 unsecured loan from her private company in the 2025–26 income year (ending 30 June 2026). The applicable benchmark rate is 8.37%, and the maximum term is 7 years.

Year	Opening Balance	Interest (8.37%)	Minimum Repayment	Closing Balance
1 (2026–27)	$150,000	$12,555	$28,533	$134,022
2	$134,022	$11,217	$28,533	$116,706
3	$116,706	$9,768	$28,533	$97,941
4	$97,941	$8,198	$28,533	$77,606
5	$77,606	$6,498	$28,533	$55,571
6	$55,571	$4,651	$28,533	$31,689
7	$31,689	$2,652	$34,341	$0

Total repaid over 7 years: approximately $204,540, of which $55,539 is interest. Michelle’s annual cash outflow to remain compliant is around $28,500 per year. This is manageable — but only if it is tracked and paid on time every year.

What Happens If You Miss a Repayment?

Missing a Division 7A minimum annual repayment is one of the most common and costly mistakes business owners make. The consequences are immediate and unavoidable:

• The shortfall becomes a deemed dividend. If your minimum repayment is $28,533 and you only pay $15,000, the $13,533 shortfall is treated as an unfranked deemed dividend in that income year.
• It is taxed at your marginal rate. At 47% (top marginal rate including Medicare levy), that $13,533 shortfall creates a $6,360 personal tax liability — on top of any other tax you are paying.
• It does not reduce the loan balance. The shortfall is assessed as a dividend but the loan balance does not reduce by that amount. The underlying loan obligation remains.
• The ATO does not readily waive the deemed dividend. There is very limited discretion available. Once the year ends with a repayment shortfall, the tax outcome is generally locked in.

The 30 June deadline is absolute. Interest and principal must be genuinely paid — not merely journalled or accrued in your accounts. A common and legitimate approach is to have the company pay a franked dividend to you, which you then apply as a repayment against the Division 7A loan. This is tax-effective because the franking credits offset some of the income tax on the dividend, effectively reducing the real cost of making the repayment. But it requires planning ahead of 30 June, not a last-minute scramble.

The ATO Benchmark Rate for 2025–26

The minimum interest rate that must be charged on a Division 7A complying loan is the ATO benchmark interest rate applicable to the income year in which the loan was made.

• 2025–26 income year: 8.37% per annum
• 2026–27 income year (current): 8.77% per annum
• 2024–25 income year: 8.77% per annum

The rate is fixed at the time the loan is made and stays for the life of that loan — regardless of what the benchmark rate is in subsequent years. So if you took out a 7-year loan in 2025–26 at 8.37%, you use 8.37% to calculate every repayment until year 7, even as the benchmark rate changes.

For a full explanation of how the benchmark rate is determined, historical rate data, and what happens if you charge below the rate, see our reference post: Division 7A Interest Rate 2025–26 — What Business Owners Need to Know.

How to Document a Complying Division 7A Loan Agreement

The written loan agreement is the foundation of Division 7A compliance. Without it — or if it is executed after the deadline — no amount of genuine repayment intention protects you from the deemed dividend.

A complying Division 7A loan agreement must include:

• The parties: Identify the lender (the company), the borrower (the shareholder or associate), and their relationship to the company
• The loan amount: State the principal amount being lent
• The interest rate: Specify that interest accrues at at least the ATO benchmark rate applicable to the income year the loan was made
• The loan term: State the maximum term — 7 years (unsecured) or 25 years (secured by registered mortgage over real property)
• Repayment obligations: Note that minimum annual repayments are required and must be paid before 30 June each year
• Signatures: The agreement must be signed by both parties (or their authorised representatives)

Do not attempt to prepare a Division 7A loan agreement from a generic template without professional review. The ATO scrutinises these documents, and an agreement that fails to meet the technical requirements provides no protection. Have a registered tax adviser or solicitor prepare or review the agreement.

Record-keeping matters too. In an ATO review or audit, you will need to produce: the signed agreement, bank records showing each repayment was made in cash (not just journalled), and a running loan balance reconciliation. Keep these records for at least 5 years from the end of the income year.

Watch: How to Manage Director Loans Properly

Mina walks through the key rules for managing director loans and Division 7A repayments in this BusiHealth video:

Frequently Asked Questions

What is the minimum annual repayment for a Division 7A loan?

The minimum annual repayment (MAR) is calculated using the ATO’s loan annuity formula, based on the loan balance, the benchmark interest rate applicable to that loan, and the remaining loan term. Pinnacle’s Division 7A loan calculator can give you a quick estimate, and the ATO’s Division 7A Calculator computes this in detail. For example, a $150,000 unsecured 7-year loan at 8.37% requires a minimum first-year repayment of approximately $28,533.

When does the Division 7A minimum repayment need to be made?

The minimum annual repayment must be made before 30 June of each income year. It must be a genuine cash payment — not a paper journal entry. If your company’s lodgement date for its tax return falls before 30 June, some advisers structure repayments around lodgement timing, but the safest approach is to target repayment well before 30 June each year.

What happens if I only partially make the minimum repayment?

The shortfall — the difference between the required minimum repayment and what was actually paid — is treated as an unfranked deemed dividend in the income year the repayment was due. So if the minimum was $28,533 and you only paid $20,000, the $8,533 shortfall is assessed as a dividend at your marginal tax rate. The loan balance on the books also does not reduce by the shortfall amount.

Do I still have to service a loan that started life as an unpaid present entitlement?

Yes. Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, held that a bare unpaid present entitlement is not a Division 7A loan. It did not unwind entitlements that had already been converted into complying section 109N loans. Where that conversion has happened, the arrangement is a loan as a matter of fact and the minimum yearly repayments continue to apply. The ATO confirms this in its Decision Impact Statement of 26 June 2026.

Can I use a company dividend to make the Division 7A repayment?

Yes — this is a legitimate and commonly used strategy. The company pays a franked dividend to the shareholder, and the shareholder applies those funds as the Division 7A repayment. The franking credits on the dividend can offset some of the income tax, effectively reducing the real cost of the repayment. This needs to be planned before 30 June and documented correctly by your accountant.

What is the maximum term for a Division 7A loan?

Unsecured Division 7A loans have a maximum term of 7 years. Loans secured by a registered mortgage over real property (with LVR not exceeding 100% at the time the security is granted) have a maximum term of 25 years. The longer term significantly reduces annual minimum repayments but requires proper legal documentation of the security arrangement.

Division 7A loan repayments are not optional, and they are not something to calculate on the back of an envelope the night before 30 June. If you have a director’s loan account or a company loan to an associate, make sure your accountant has the repayment schedule locked in and monitored throughout the year. Contact Pinnacle Accounting & Advisory to get your Division 7A position reviewed before the next deadline.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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Division 7A is an anti-avoidance rule that stops business owners taking money out of their private company tax-free. If a company lends money to, pays expenses for, or forgives a debt of a shareholder or associate, the amount can be treated as an unfranked dividend and taxed, unless it is repaid or put on a complying loan. If the borrowed funds are headed for a home loan offset account, the timing rules matter even more: see borrowing from your company to fund your offset account.

If you run a business through a company and you’ve ever taken money from it — as a loan, a payment for personal expenses, or simply a transfer to your personal bank account — you need to understand Division 7A. This is one of the ATO’s most actively enforced tax rules for private company owners, and it catches more business owners off guard every year than almost any other provision.

Division 7A was designed to stop shareholders from quietly extracting company profits without paying tax. Get it wrong and the ATO will treat the money you took as an unfranked dividend — taxable at your full marginal rate, with no franking credits to offset it. That can mean a tax bill of 47 cents in the dollar on money you thought was just a loan.

In this plain-English guide, Mina Baselyous — CPA and Chartered Tax Adviser (CTA) at Pinnacle Accounting & Advisory — explains exactly what Division 7A is, who it applies to, what triggers it, and how to stay on the right side of it. If your company has ever lent money to you, a family member, or a connected trust, read this carefully.

What Is Division 7A?

Division 7A is contained in the Income Tax Assessment Act 1936 (Cth). It creates rules around how private companies can advance money to shareholders and their associates. The core principle is straightforward: if a private company gives money to a shareholder or their associate without it being structured as a legitimate salary, declared dividend, or complying loan, the ATO treats that money as a deemed dividend — fully taxable and unfranked.

Division 7A applies to private companies — also called closely held companies — in Australia. Public companies are generally outside scope. It applies not only to direct shareholders but also to their associates, which the ATO defines broadly to include spouses, adult children, siblings, parents, and related entities such as family trusts.

The rules have been in place since 1997 and have been progressively tightened. Today, the ATO cross-references company loan accounts with tax returns and has access to significant data-matching capabilities. If you have a loan from your company sitting in your accounts, assume the ATO can see it.

Who Does Division 7A Apply To?

Division 7A catches any payment, loan, or debt forgiveness made by a private company to:

• Shareholders — including directors who hold shares
• Associates of shareholders — spouses, adult children, parents, siblings, related trusts, and companies where the shareholder has influence
• Former shareholders — in some circumstances

It does not matter whether the recipient intended the arrangement to be temporary or informal. What matters is whether the payment, loan, or forgiveness meets the ATO’s criteria for a complying arrangement. If it does not, Division 7A applies.

A practical example: if your family trust distributes income to your bucket company and the company does not actually receive the cash, an unpaid present entitlement (UPE) arises. Following Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, that entitlement is not itself a section 109D loan while the company simply leaves it alone, and no deemed dividend arises from it. The ATO accepted this in its Bendel Decision Impact Statement of 26 June 2026. What can still bite is Subdivision EA, if the trust then pays money to, lends to, or forgives a debt of a shareholder of that company or their associate while the entitlement is outstanding. Multi-entity structures involving trusts and companies still need active monitoring every income year.

What Triggers Division 7A?

There are three main events that trigger Division 7A:

1. Loans from the Company

When a private company lends money to a shareholder or associate, Division 7A applies unless the loan is structured as a complying loan agreement. The loan must be documented in writing before the company’s tax return is lodged, must charge at least the ATO’s benchmark interest rate, and must include minimum annual repayments. If any of these conditions are not met, the loan — or the shortfall — becomes a deemed dividend.

2. Payments to Shareholders or Associates

Any payment from a private company to a shareholder or associate that is not salary, wages, a declared dividend, or a repayment of money the shareholder lent to the company is treated as a Div 7A loan. This includes paying a shareholder’s personal expenses directly from the company account — holidays, home renovations, school fees. Each unauthorised payment can be a separate Div 7A event.

3. Debt Forgiveness

If a private company forgives a debt owed by a shareholder or associate — formally or informally — the amount forgiven is treated as an unfranked deemed dividend in the year of forgiveness. Even a casual decision to write off an old director’s loan account can trigger this. Debt forgiveness is the trigger people least expect.

What Is a Deemed Dividend?

A deemed dividend is the tax consequence of a Division 7A breach. Rather than the amount being treated as a loan that gets repaid, the ATO treats it as though the company paid a dividend to the shareholder.

Here is why it is so painful:

• The deemed dividend is included in your assessable income — you pay tax on it in that income year
• It is unfranked — no franking credits to offset the tax liability
• It is taxed at your full marginal rate — up to 47% including the Medicare levy
• The company does not get a deduction for the deemed dividend
• The loan balance typically remains on the company books as well

The deemed dividend is capped at the company’s distributable surplus for the year. For a detailed explanation of how distributable surplus works and how it can limit your exposure, read our guide: Division 7A Distributable Surplus — What Melbourne Business Owners Need to Know.

The ATO Benchmark Interest Rate

Any complying Division 7A loan must charge interest at at least the ATO’s benchmark interest rate. This rate is published by the ATO annually and is based on the Reserve Bank of Australia’s indicator lending rate for standard variable housing loans.

For the 2025–26 income year, the benchmark rate was 8.37% per annum. For the current 2026–27 income year, the rate is 8.77% per annum.

Importantly, the rate that applies to your loan is the rate in the income year the loan was made — and it stays fixed for the life of the loan. For a full breakdown of historical rates and how to apply the benchmark rate correctly, see our dedicated reference post: Division 7A Interest Rate 2025–26 — What Business Owners Need to Know.

How to Stay Compliant — The Complying Loan Agreement

Division 7A does not prevent companies from lending money to shareholders. It just requires that loans are structured correctly. To avoid a deemed dividend, every Division 7A loan must:

1. Be in writing — a signed loan agreement must exist before the company’s income tax return is lodged for the year the loan was made
2. Charge at least the benchmark interest rate — interest cannot be waived or reduced below the ATO rate
3. Meet the maximum loan term — 7 years for unsecured loans, 25 years for loans secured by a registered mortgage over real property
4. Include minimum annual repayments — principal and interest must be paid each year by 30 June; missing a repayment creates a new deemed dividend equal to the shortfall

The timing of the written agreement is critical and often misunderstood. The agreement must be signed before the earlier of: the lodgement date of the company’s tax return, or the due date for lodgement. If you miss this window, no amount of good intentions will fix it — the loan becomes a deemed dividend and there is no retrospective remedy.

For a detailed breakdown of minimum repayment calculations and what happens when payments are missed, see: Division 7A Loan Repayments: How They Work and What Happens If You Miss Them.

What Does Getting It Wrong Actually Cost?

Here is a real-world example that shows the stakes clearly.

Suppose you are a business owner operating through a company that has $200,000 in retained profits. Over the course of the year, you transfer $80,000 from the company account to your personal account — not as salary, not as a declared dividend. Your accountant lodges the company’s tax return before you have a written loan agreement in place.

The ATO treats the $80,000 as a Division 7A deemed dividend. At a marginal tax rate of 47% (including Medicare levy), your personal tax bill on that money is $37,600. Meanwhile, the company already paid 25% tax on those profits before they sat in retained earnings. The total tax drag on that $80,000 is severe — effectively double taxation with no franking credits to help.

Had the same $80,000 been structured as a complying 7-year Division 7A loan at 8.77% benchmark rate, the minimum annual repayment in Year 1 would be approximately $16,500 — use our Division 7A calculators to model your own numbers — a manageable cash outflow, not a $37,600 tax shock. The difference in outcome is significant, and it comes down entirely to getting the documentation right before the return is lodged.

For the five most common traps that lead to exactly this kind of outcome, read: Top 5 Critical Division 7A Loan Traps To Avoid Now.

Watch: Borrowing From Your Company — What You Need to Know First

Prefer to watch instead of read? This BusiHealth short covers the key Division 7A risk every business owner borrowing from their company needs to be across:

Related Division 7A Resources

This post is part of Pinnacle’s Division 7A content cluster. For deeper coverage of specific aspects:

• Division 7A Explained: The Complete Guide for Australian Business Owners
• Division 7A Loan Repayments: How They Work and What Happens If You Miss Them
• How to Avoid a Division 7A Deemed Dividend — 5 Strategies That Work
• Division 7A Interest Rate 2025–26 — What Business Owners Need to Know
• Division 7A Explained: Loans, Interest Rates and Rules Every Business Owner Needs to Know
• Division 7A Distributable Surplus — What Melbourne Business Owners Need to Know
• Top 5 Critical Division 7A Loan Traps To Avoid Now
• Division 7A — Eliminating the Loan: An Essential Melbourne Business Tax Guide

Frequently Asked Questions

What is Division 7A in simple terms?

Division 7A is a set of ATO rules that prevent shareholders of private companies from accessing company profits tax-free through loans, payments, or debt forgiveness. If you take money from your company without structuring it as a proper salary, declared dividend, or complying loan, the ATO treats it as a fully taxable unfranked dividend — meaning you pay income tax at your marginal rate with no franking credits to offset it.

Who does Division 7A apply to?

Division 7A applies to private companies (closely held companies) in Australia. It catches payments, loans, and debt forgiveness made to shareholders and their associates — which includes spouses, adult children, parents, related trusts, and related companies. Public companies are generally outside scope.

What is a Division 7A complying loan?

A complying Division 7A loan is a written loan agreement between the company and the shareholder (or associate) that meets the ATO’s requirements: it must be in writing before the company’s return is lodged, charge at least the benchmark interest rate, not exceed the maximum loan term (7 years unsecured, 25 years secured), and include minimum annual repayments. A complying loan avoids the deemed dividend outcome.

What is the Division 7A benchmark interest rate?

The ATO sets a benchmark interest rate annually, based on the Reserve Bank of Australia’s variable housing loan indicator rate. For 2025–26 it was 8.37%. For 2026–27 it is 8.77%. Every complying Division 7A loan must charge at least this rate. The rate applicable to a loan is the rate in the year the loan was made, and it stays fixed for the life of that loan. Check ato.gov.au for the current and historical rates.

Does an unpaid trust distribution to my bucket company trigger Division 7A?

Not by itself, following the High Court’s decision in Commissioner of Taxation v Bendel [2026] HCA 18 on 10 June 2026. An unpaid present entitlement that the company simply leaves outstanding is not a loan under section 109D, and the ATO accepted this in its Decision Impact Statement of 26 June 2026. Subdivision EA still applies where the trust pays, lends to, or forgives a debt of a shareholder of the company or their associate while the entitlement is outstanding, section 100A still applies to reimbursement agreements, and an entitlement already converted into a complying loan remains a loan that must be serviced.

What happens if I already have a Division 7A problem?

Options depend on timing. Before the company’s tax return is lodged, it may be possible to rectify by putting a complying loan agreement in place. After lodgement, the deemed dividend is generally locked in for that year. For missed repayments, there is very limited ATO discretion to waive the consequences. The earlier you engage a tax adviser, the more options you have — speak to Mina at Pinnacle as soon as possible if you have a Div 7A concern.

Division 7A is one of those rules where the cost of getting advice early is a fraction of what it costs to fix a problem after the return is lodged. If you have a private company structure, have your Division 7A position reviewed proactively every year — not as an afterthought. Contact Pinnacle Accounting & Advisory to book a consultation with Mina.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

Division 7A problems often trace back to structure; sound business structuring prevents them.

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A bucket company is a company that receives distributions from a family trust, capping the tax on that income at the corporate rate of 25% or 30% instead of personal rates up to 47%. Pairing a family trust with a bucket company is a common strategy to retain and reinvest surplus profits tax-effectively. For the full mechanics, including what decides the 25% or 30% rate and the top-up tax on extraction, see our complete guide to bucket companies in Australia.

If you operate a profitable business through a family trust, you are probably already benefiting from income splitting. But there’s a second layer to the strategy that most accountants don’t explain until you’re already paying $50,000+ in tax each year — the bucket company. Understanding how a family trust and bucket company work together is arguably the most powerful tax-minimisation structure available to Australian business owners, and yet it’s used by a surprisingly small percentage of people who could benefit from it.

This guide explains what a bucket company is, how it works alongside a family trust, the numbers behind the tax savings, and the key rules you need to follow to stay on the right side of the ATO. If you haven’t yet set up your family trust, start with our guide to how to set up a family trust in Australia. If you want to understand trust distributions before adding the bucket company layer, read our guide to family trust distributions and ATO compliance first. For a broader overview of all Australian business structures and how to choose the right one, see our complete guide to business structures in Australia.

What Is a Bucket Company?

A “bucket company” is simply a private company that acts as a beneficiary of your family trust. It has no employees, no trading activity, and no assets in its own right. Its entire purpose is to receive trust distributions at the corporate tax rate — and hold that income in a lower-tax “bucket” until you decide what to do with it.

The name “bucket” is informal — you won’t find it in any ATO legislation — but it perfectly describes the function: excess income flows from the trust into the company the way water flows into a bucket. The company traps it at a lower tax rate, and you access it later in a tax-efficient way.

The key advantage is tax rate arbitrage. Australia’s corporate tax rate for base rate entities (companies with aggregated turnover below $50 million) is 25%, but only where the company passes the base rate entity test, which turns on how much of its income is passive. If you or your spouse earn over $180,000, your marginal tax rate is 45% (plus the 2% Medicare Levy = 47%). Every dollar of trust income you redirect from your personal tax return to the bucket company saves approximately 22 cents in the dollar — immediately.

How the Trust + Bucket Company Combination Works

Here’s how the structure operates in practice:

Step 1: Your business operates under the family trust (or the family trust holds shares in your trading company). The trust generates net income each financial year.

Step 2: Before 30 June, the trustee makes a resolution distributing income among beneficiaries. Lower-income family members receive income up to the tax-free threshold or lower marginal rate bracket. The remaining income — which would otherwise be taxed at the high-income earner’s marginal rate — is distributed to the bucket company.

Step 3: The bucket company receives its distribution and pays tax at 25% (base rate entity) or 30% (large company). The after-tax amount sits inside the company as retained earnings.

Step 4: Over time, you access the money from the company via dividends, a Director’s salary, or other compliant mechanisms — all discussed below.

The Numbers: A Real-World Tax Saving Example

Let’s say your family trust earns $400,000 in net profit this financial year. You and your spouse are both on high incomes. Here’s what happens without a bucket company versus with one:

Without a bucket company:

• Distribute $200,000 to you and $200,000 to your spouse
• Both of you are in the 45% tax bracket on the top slice
• Approximate combined tax on $400,000: ~$146,000

With a bucket company:

• Distribute $120,000 to you (keeping you at the 37% bracket on top income)
• Distribute $90,000 to your spouse (at 32.5% on the top slice)
• Distribute the remaining $190,000 to the bucket company at 25%
• Approximate combined tax: ~$88,500
• Annual tax saving: approximately $57,500

This is a simplified illustration — actual savings depend on your specific income profile, the trust’s tax position, and how distributions are structured. But the magnitude is real: for a business generating $400,000–$800,000 in annual trust income, the bucket company strategy routinely saves $40,000–$100,000+ per year.

How to Access Money From the Bucket Company

This is the question most people ask first — and rightly so. The tax saving is only useful if you can eventually access the money in a tax-efficient way. There are three main methods:

1. Franked Dividends

When the company has paid tax on its retained earnings, it can pay you a franked dividend. Because the company already paid 25% tax on that income, you receive a franking credit that offsets your personal tax liability. Where a trust holds the company shares, a family trust election is usually what lets those credits reach beneficiaries. If your marginal rate is 25% or below, you may even receive a refund of excess franking credits.

Example: The bucket company has $100,000 in after-tax retained earnings (on which it already paid $33,333 in tax at 25% rate). It pays a $100,000 dividend with $33,333 in franking credits. A shareholder on a 32.5% marginal rate would owe $43,333 in tax on $133,333 of gross income, offset by $33,333 of credits — combined net additional tax of $10,000. This is significantly better than having received the $133,333 directly and paying $43,333 in tax.

2. Director’s Salary

If you or your spouse are directors of the bucket company, you can pay yourselves a salary from the company. The salary is a deductible expense for the company and is included in your personal income. This makes sense when your marginal rate is lower than the corporate rate — for example, in a year when you have little other income.

3. Division 7A Loans — Tread Carefully

If the company lends money back to you (or an associated entity) without following strict rules, the ATO treats it as an unfranked dividend under Division 7A of the Income Tax Assessment Act 1936. This is one of the most common and costly mistakes made with bucket companies. Division 7A applies to loans, payments, and debt forgiveness by private companies to shareholders or associates.

To avoid a Division 7A deemed dividend, any loan from the bucket company must be documented as a compliant loan agreement, charged the ATO’s benchmark interest rate, and repaid over the maximum term (7 years for unsecured loans, 25 years for secured). We have a detailed guide on Division 7A loans that covers the rules in full. Getting this wrong is expensive — the entire loan amount can be treated as assessable income in the year the error occurs.

Note that money actually taken out of the company is a different question from an entitlement the company has never been paid. Following Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, an unpaid present entitlement that the bucket company simply leaves sitting in the trust is not a section 109D loan. A genuine advance of cash out of the company to a shareholder or associate still is one, and Bendel changes nothing about that.

Asset Protection Benefits

Beyond tax, the bucket company offers meaningful asset protection. Money held inside a company is generally protected from claims against you personally. If you face business litigation, a creditor pursuing you personally generally cannot reach assets held in a company (unless there is a personal guarantee involved or the court pierces the corporate veil).

Over time, as the bucket company accumulates retained earnings, it can invest in shares, property, or other assets — building a pool of capital that is separate from your personal estate and more difficult for creditors to reach. This long-term wealth accumulation function is as valuable as the annual tax saving for many business owners.

When the Trust + Bucket Company Strategy Makes Sense

This structure isn’t for everyone. It adds compliance cost (the company needs its own tax return, ASIC fees, and annual accounting) and the money inside the company is not as easily accessible as personal savings. The strategy is best suited for:

• Business owners generating $200,000+ per year in trust net income
• High-income earners (above $120,000 in personal taxable income)
• Business owners who don’t need immediate access to all their profits
• People focused on long-term wealth building and asset protection
• Situations where the tax saving clearly exceeds the annual compliance cost

For smaller businesses still growing, the structure may not justify itself until profitability reaches a meaningful threshold. A qualified tax adviser — such as a Chartered Tax Adviser (CTA) — can model your exact numbers and confirm whether it makes sense for your situation.

How to Structure It Correctly From the Start

The most important decisions happen at setup time:

• Trust deed must name the company as an eligible beneficiary. If the bucket company is set up after the trust, ensure the trust deed allows it to receive distributions. Many older deeds are narrow in their beneficiary definitions — a deed variation may be needed.
• The company must be a base rate entity to attract the 25% rate. Ensure it doesn’t hold passive investments in a way that would reclassify it as a non-base rate entity (30% rate).
• Shareholder structure matters. Who owns the shares in the bucket company determines who can receive dividends. Typically the shares are held by individuals or by a family trust itself (adding another layer of flexibility).
• Directors should be carefully chosen. Directors have personal liability exposure — this is a consideration if the company borrows or provides guarantees.
• Separate bank accounts and bookkeeping for the company are mandatory. Commingling funds with the trust or personal accounts creates a Division 7A risk from day one.

For guidance on setting up the trust itself, see our full family trust setup guide and our tax planning services. If you’re comparing all available structures, our business structuring service walks through every option for Australian business owners.

Risks and Limitations to Understand

No strategy is without complexity. The main risks and limitations to be aware of:

• Locked funds. Money inside the company can’t be withdrawn informally. Every extraction must follow the rules (dividends, salary, compliant loans). This requires discipline and planning.
• Annual compliance cost. The company needs its own ASIC registration (~$310/year), tax return, and accounting. Budget $1,500–$3,000/year for company compliance costs.
• Division 7A traps. If the company lends money back to you without a compliant loan agreement, the ATO treats the loan as a dividend. This is easy to accidentally trigger and hard to unwind.
• Subdivision EA. Where the trust still owes the bucket company an unpaid entitlement, a payment or loan from the trust to a shareholder of that company, or to their associate, can trigger a deemed dividend under Subdivision EA. This is now the main Division 7A exposure in a trust and bucket company structure.
• ATO Scrutiny. The ATO monitors trust distributions to related companies closely, particularly under the Section 100A rules. Ensure distributions are genuine and the company actually holds and uses the distributed funds.
• Franking credits have a shelf life. Franking credits generated in the company can only be used when dividends are paid. If the structure is wound up or changes substantially, unused credits may be lost.

Frequently Asked Questions

Do I need a separate bucket company or can I use my existing trading company?

You should always use a separate company as your bucket company. Your trading company carries business liabilities — using it as the distribution beneficiary exposes your accumulated profits to the risks of the business (creditors, litigation). A dedicated bucket company ring-fences the wealth from the trading risks. This is a non-negotiable aspect of the structure.

What’s the best way to access money from a bucket company?

The most tax-efficient method depends on your personal income level. In most cases, franked dividends are the cleanest approach — particularly when you or family members have capacity in lower tax brackets. For high-income years, it may be better to leave money in the company and pay a small Director’s salary in future years when income is lower. Discuss this with your accountant each year as part of your annual distribution planning.

Can I use my bucket company to invest in property or shares?

Yes — and this is one of the most powerful long-term uses of the structure. A bucket company can invest in Australian shares and receive fully franked dividends from those investments (which come with franking credits). It can also purchase investment property, although the 50% CGT discount is not available to companies. Over a 10–20 year horizon, a bucket company that invests its retained earnings can accumulate substantial wealth outside the reach of personal creditors.

Does the ATO have specific rules targeting this strategy?

The ATO accepts the trust-to-company distribution strategy where it is commercially genuine. The key compliance areas are: Section 100A (where distributions lack genuine economic substance), Subdivision EA (where trust funds find their way to a shareholder of the bucket company or their associate while an entitlement is unpaid), Division 7A (loans from the company back to associates), and the base rate entity test (which determines whether 25% or 30% applies). A well-structured arrangement, properly documented and administered, is entirely within the law.

How does this relate to the existing bucket company post on Pinnacle’s site?

Our related article on how a bucket company can save your business thousands in tax covers the mechanics of bucket companies in more detail. This article focuses specifically on how the family trust and bucket company work together as a combined structure, including the specific distribution decisions and the order of operations each financial year.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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