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.
Are your Division 7A arrangements correctly structured?
Avoiding a deemed dividend is entirely achievable with the right structure and timing. Mina works with Melbourne business owners to review company loan arrangements and implement compliant strategies before each lodgement deadline. Book a consultation today.
Book a Consultation →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.
General Advice Warning: The information provided in this article is general in nature and does not constitute personal financial, tax or legal advice. It has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on this information, please consider its appropriateness to your circumstances and seek independent professional advice from a qualified accountant or tax advisor.
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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