Division 7A is an Australian tax rule that stops private company owners and their associates from taking money out of the company tax-free. If a company loans, pays, or forgives a debt to a shareholder or associate without a complying loan agreement, the ATO treats the amount as an unfranked deemed dividend, taxed at the recipient’s marginal rate.

If you run your business through a company, there is one piece of tax law that catches more business owners off guard than almost anything else: Division 7A. I see it regularly — smart, hard-working people who have been drawing money from their company without realising the tax consequences they are triggering. A loan here, a payment there, a company card used for personal expenses — and suddenly the ATO treats the whole lot as an unfranked dividend taxed at up to 47 cents in the dollar.

Division 7A is not complicated once you understand the mechanics. But it is unforgiving on timing. This guide covers everything: what Division 7A is, who it applies to, how complying loans work, what happens when you get it wrong, and the five strategies that prevent a deemed dividend from arising in the first place.

What Is Division 7A?

Division 7A is a provision in Australian tax law that prevents private company owners and their associates from accessing company funds tax-free. If a company makes a payment, loan, or forgives a debt to a shareholder or associate without a proper loan agreement, the ATO treats it as an unfranked dividend — meaning the full amount becomes taxable income with no franking credits to offset it.

The rules are contained in Division 7A of the Income Tax Assessment Act 1936 (Cth) and have been in place since 1997, progressively tightened as the ATO has closed loopholes. The purpose is straightforward: to stop shareholders extracting company profits without paying tax at their personal marginal rate.

Before Division 7A, business owners could simply “borrow” money from their company indefinitely — no interest, no repayment schedule — effectively enjoying tax-free access to retained company profits. Today, the ATO cross-references company loan accounts with individual tax returns and uses data-matching to identify non-complying arrangements. If your company has a loan account in your name, assume the ATO can see it.

Who Does Division 7A Apply To?

Division 7A applies to private companies — also called closely held companies. Public companies are generally outside scope. The rules catch payments, loans, and debt forgiveness made to:

• Shareholders — including directors who hold shares in the company
• Associates of shareholders — a broad category including spouses, adult children, parents, siblings, related trusts, and companies in which the shareholder has influence
• Former shareholders — in certain circumstances

There are three types of events that trigger Division 7A:

1. Loans — any money advanced from the company to a shareholder or associate, whether formal or informal, including personal expenses paid by the company directly from its bank account
2. Payments — payments made on behalf of a shareholder or associate that are not salary, a declared dividend, or a commercial arms-length transaction
3. Debt forgiveness — where the company writes off or forgives a loan owed by a shareholder or associate; the forgiven amount is treated as a deemed dividend in the year of forgiveness

Family trusts and bucket companies are a particularly common exposure point. When a discretionary family trust distributes income to a corporate beneficiary (a “bucket company”) and does not physically pay the distribution in cash, an unpaid present entitlement (UPE) arises. Under the ATO’s Tax Ruling TR 2010/3, a UPE must be placed on complying Division 7A loan terms with the company — or it is treated as a financial accommodation subject to Division 7A. Multi-entity structures involving trusts and companies need active monitoring every income year.

How Does a Division 7A Loan Work?

A Division 7A loan (Div 7A loan) is any financial arrangement where a private company advances money to a shareholder or associate. The critical question is whether it is a complying loan — because a complying loan avoids the deemed dividend outcome entirely.

To be a complying Division 7A loan, all of the following must be satisfied:

• Written agreement: A signed loan agreement must be in place before the lodgement day of the company’s income tax return for the income year the loan was made. A verbal understanding or a ledger entry is not sufficient.
• Benchmark interest rate: The loan must charge interest at least equal to the ATO’s benchmark interest rate. Charging less — or no interest at all — creates an additional Division 7A exposure.
• Maximum loan term: 7 years for an unsecured loan, or up to 25 years if the loan is fully secured by a registered mortgage over real property.
• Minimum annual repayments: A minimum repayment of principal and interest must be made each year before the company’s lodgement date. Failure to make the minimum repayment triggers a deemed dividend equal to the shortfall.

The Benchmark Interest Rate

The ATO sets the Division 7A benchmark interest rate annually, based on the Reserve Bank of Australia’s indicator lending rate for standard variable housing loans. The rate that applies to a loan is fixed in the income year the loan is made and does not change for the life of that loan.

• 2026–27 (current year): 8.77% per annum
• 2025–26: 8.37% per annum
• 2024–25: 8.77% per annum
• 2023–24: 8.27% per annum
• 2022–23: 4.77% per annum

A loan established in 2025–26 is locked in at 8.37%, making minimum repayments lower and more manageable than a loan established in the current 2026–27 year at 8.77%. For the full historical breakdown and how the benchmark is determined, see: Division 7A Interest Rate 2025–26 — What Business Owners Need to Know.

Minimum Yearly Repayments

Every year a Div 7A loan is outstanding, a minimum repayment must be made. The ATO’s Division 7A calculator will compute the exact amount for your situation — or use our Pinnacle Division 7A Loan Calculator for a quick estimate using the current benchmark rate. As a practical illustration: a $100,000 unsecured 7-year loan at 8.37% (the 2025–26 rate) requires a Year 1 minimum repayment of approximately $19,485. Repayments stay roughly constant each year — like a standard principal-and-interest mortgage — until the loan is fully repaid in Year 7.

One important escape hatch: if the full loan amount is repaid before the company’s tax return lodgement date for that income year, no Division 7A issue arises at all. Many business owners use this window deliberately as part of their tax planning. For a full repayment schedule breakdown and what happens if you miss a payment, see: Division 7A Loan Repayments: How They Work and What Happens If You Miss Them.

What Happens If You Get Division 7A Wrong?

The consequence of breaching Division 7A is a deemed dividend — one of the most painful tax outcomes available under Australian tax law, and one that is entirely avoidable with the right planning.

A deemed dividend:

• Is included in your assessable income in full — you pay personal income tax on it in that income year
• Carries no franking credits — unlike a properly declared dividend, you get no tax offset
• Is taxed at your marginal rate — which can be as high as 47% including the Medicare levy
• Does not reduce the company’s retained earnings the way a real dividend would — so you are taxed on the money, and the debt still sits on the company’s books

Beyond the immediate tax cost, a Division 7A breach signals ATO audit risk. If the ATO identifies a Div 7A loan that has not been properly documented, they may look further — reviewing multiple years of loan accounts, company returns, and related entity transactions. Penalties and general interest charge can add substantially to the cost of an undiscovered historical breach.

The deemed dividend is capped at the company’s distributable surplus for that income year — covered in the next section. Do not rely on a low or zero distributable surplus as a safety net: it only limits the current year’s exposure, and the loan balance remains on the books for future years.

Distributable Surplus: How It Limits the Deemed Dividend

Distributable surplus is the concept that caps how large a deemed dividend can be. Even if Division 7A is breached, a deemed dividend cannot exceed the company’s distributable surplus for that income year.

The formula under section 109Y of the ITAA 1936:

Distributable Surplus = Net Assets − (Paid-up Share Capital + Amounts Taken into Account for Franking Balance)

In practical terms: start with the company’s net assets at year end (total assets minus total liabilities, excluding the Div 7A loan payable itself), then subtract paid-up share capital and the company’s franking account balance.

Example: Pinnacle Pty Ltd has net assets of $250,000 at year end. Paid-up share capital is $2. Franking surplus is $48,000. Distributable surplus = $250,000 − $2 − $48,000 = $201,998.

If the director has a $150,000 Div 7A loan that has breached the rules, the deemed dividend is the lower of $150,000 and $201,998 — so the full $150,000 is a deemed dividend. If instead the distributable surplus was only $80,000, the deemed dividend is capped at $80,000 for that year — the remaining $70,000 stays as a loan but will be exposed again in future years if the surplus increases.

Calculating distributable surplus correctly requires working from the company’s verified balance sheet. Small errors in the underlying accounts can significantly distort the result — it is not something to estimate casually. For a dedicated guide, see: Division 7A Distributable Surplus — What Melbourne Business Owners Need to Know.

5 Ways to Avoid a Division 7A Deemed Dividend

Division 7A is entirely avoidable with the right planning. Here are the five most effective strategies:

1. Put a complying loan agreement in place before lodgement day.
   If your company has lent money to you during the income year, a written, signed loan agreement must be executed before the earlier of 30 June or the company’s tax return lodgement date. This is the single most important action. The agreement must specify the benchmark interest rate, maximum loan term (7 or 25 years), and minimum repayment obligations. Do not wait until year end — speak to your adviser when transactions occur.
2. Make minimum yearly repayments on time — in cash.
   Having the agreement in place is only half the job. You must make the minimum annual repayment before lodgement day each year. Repayments must be genuine cash movements — you cannot journal a paper entry. One legitimate and tax-effective strategy: have the company pay a franked dividend to the shareholder, then apply those funds as the loan repayment. This combines the repayment obligation with access to the company’s franking credits.
3. Pay a dividend to clear the debt before year end.
   If the company has sufficient franking credits and retained earnings, declaring and paying a franked dividend before year end can clear or reduce the loan balance. The shareholder receives the dividend (taxed at marginal rate with franking credit offset) and applies it against the outstanding loan. This is most effective when the company’s franking account is high relative to the loan amount. For five dedicated strategies in full detail, see: How to Avoid a Division 7A Deemed Dividend — 5 Strategies That Work.
4. Use a Division 7A sub-trust arrangement for UPEs.
   Where a family trust has an unpaid present entitlement (UPE) to a private company, the UPE must be placed on complying Div 7A loan terms or paid in cash. A sub-trust arrangement allows the trust to hold the funds separately while meeting the compliance requirements. This is the standard solution for multi-entity trust and company structures where cash distributions are not practical in the short term — but it requires professional guidance to implement correctly.
5. Get the structure right before you take money out.
   The most cost-effective approach is preventive. Before drawing money from your company — as a payment, a “loan”, or by paying personal expenses from the company account — speak with your adviser about the correct structure. Salary? Dividend? Complying loan? Each has different tax outcomes. The cost of advice before the transaction is vastly cheaper than the tax consequences of getting it wrong after lodgement day.

Worked Example: The Cost of Getting Division 7A Wrong

Let’s make the stakes concrete. Alex operates his business through Alex Holdings Pty Ltd. The company earns $100,000 net profit in the 2025–26 year, pays 25% company tax ($25,000), and retains $75,000 in after-tax profit.

Over the year, Alex transfers $60,000 from the company account to his personal bank account to cover living expenses. No salary arrangement is in place. No loan agreement is signed. The company’s tax return is lodged in October — by which point it is too late to put the loan on complying terms.

What the ATO does:

• Treats the $60,000 as an unfranked deemed dividend in Alex’s personal return
• Alex pays income tax at his marginal rate of 47% (including 2% Medicare levy): $28,200 personal tax bill
• No franking credit offset is available — had this been a properly declared franked dividend, the $25,000 company tax already paid would have provided a credit
• The $60,000 also remains as a loan on the company’s books — the deemed dividend did not extinguish the debt

Done properly with a complying 7-year loan at 8.37%:

• Written loan agreement in place before the return is lodged
• Year 1 minimum repayment: approximately $11,690
• Alex pays this from personal funds or via a franked company dividend applied against the loan
• No deemed dividend arises. The loan reduces systematically over 7 years.
• Interest in Year 1: approximately $5,022 — the only taxable component, generating tax of roughly $2,360 at 47%

The difference: $28,200 personal tax done wrong, versus approximately $2,360 interest tax done properly in Year 1 — a $25,840 difference from one decision about documentation. This is exactly the kind of situation I manage at Pinnacle Accounting & Advisory. The rules are not complicated; the window to act closes on lodgement day.

Division 7A benchmark interest rates by year

Every complying Division 7A loan must charge at least the ATO benchmark interest rate for the income year in which the loan was made. The rate is set at the start of each income year and stays fixed for the life of that loan, so the rate that applies depends on when the loan was made, not when it is repaid.

Income year (ended 30 June)	Benchmark interest rate
2026-27 (current)	8.77%
2025-26	8.37%
2024-25	8.77%
2023-24	8.27%
2022-23	4.77%

Always confirm the current rate directly with the ATO at ato.gov.au, as it is updated annually.

Common Division 7A traps for business owners

In our experience working with private company owners, the same Division 7A traps come up again and again. These are the ones worth watching for:

1. Taking cash from the company without formalising it

A director transfers funds from the company account to their personal account, not as salary and not as a declared dividend. At year end this appears in the accounts as a loan to the director and triggers Division 7A. Without a complying agreement in place before the return is lodged, it becomes a deemed dividend.

2. Forgetting to put the loan agreement in writing

A verbal understanding between director and company is not sufficient. The ATO requires a written agreement in place before the earlier of the lodgement date or the due date of the company return. Miss that window and the loan becomes a deemed dividend, even where repayment was always intended.

3. Missing a minimum annual repayment

Division 7A requires a repayment every single year, not just when funds are available. A missed or short repayment creates a deemed dividend equal to the shortfall for that income year, compounding the problem rather than rolling it forward.

4. Trust distributions owed to a private company

Where a trust distributes income to a bucket company but does not pay the cash, the resulting unpaid present entitlement can fall within Division 7A under specific rules. This is a common trap in family trust and bucket company structures and needs active review each year.

5. Assuming Division 7A only applies to directors

Division 7A applies to shareholders and their associates. Associates include spouses, adult children, parents, siblings, and companies or trusts connected to them. A loan from your company to your spouse can trigger Division 7A just as much as a loan to you directly.

Because these traps usually sit inside multi-entity arrangements, getting the business structure right from the outset and keeping loan accounts and trust distributions monitored through a Virtual CFO or ongoing business advisory engagement is the most reliable protection against an unexpected deemed dividend.

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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