Division 7A Loans: What You Need To Know

Jul 31, 2026 | Small Business

Division 7A Loan Agreements

Division 7A Loans: What Every Company Owner Needs to Know Before You Lodge

If you run your business through a private company, there’s a fair chance you’ve taken money out of it at some point during the year. Maybe you covered a personal bill from the company account, drew a little extra when cash flow allowed, or simply borrowed against the profits to tide things over at home. It feels harmless enough. After all, it’s your company. Unfortunately, the Australian Taxation Office sees these arrangements quite differently, and the rule that governs them, Division 7A, catches out more business owners than almost any other part of our tax law.

So what is Division 7A?

Division 7A of the Income Tax Assessment Act 1936 exists to stop shareholders of private companies from quietly pulling profits out as tax free loans instead of taking them as taxable dividends or wages. When a private company lends money to a shareholder or their associate, and associates include spouses, family members, family trusts and related entities, Division 7A can treat that loan as an unfranked deemed dividend. In plain terms, the money you thought you had borrowed becomes assessable income in your hands, taxed at your marginal rate, and without the franking credits that would normally soften the blow.

It isn’t only formal loans that trigger it, either. Division 7A can also apply when your company pays a personal expense on your behalf, lets you use a company asset for private purposes, or forgives a debt you owed it. Amounts that move through an interposed entity, such as a family trust making a distribution to a company where the funds then find their way back to you, can be caught as well. The reach is wider than most people expect.

Why it matters, in dollars

The consequences are not trivial. Say your company advanced you $200,000 during the year and nothing was done to repay or document it. If that amount is treated as an unfranked dividend, it is added to your taxable income for the year. For someone already on the top marginal rate, that can mean a tax bill approaching $94,000 on money you always thought of as your own, with no franking credits to offset it. It is one of the more expensive surprises we see land on a client’s desk, and it is almost always avoidable.

The two clean ways to stay onside

The good news is that Division 7A is entirely manageable with a bit of planning. You essentially have two clean options for keeping a loan compliant. The first is simply to repay it in full before your company’s lodgement day, which is the earlier of the due date for your company tax return and the day you actually lodge it. The second, and by far the more common in practice, is to put the loan under a complying Division 7A loan agreement before that same lodgement day.

A complying agreement has a few non negotiable features. It must be in writing and in place before the company lodges its return. It must charge at least the ATO benchmark interest rate, which for the 2026 to 2027 income year is 8.77 per cent. And it must run for no longer than the maximum term, being seven years for an unsecured loan or twenty five years for a loan properly secured over real property. From there, you must make a minimum yearly repayment covering both principal and interest by 30 June each year. Fall short on a repayment, and the shortfall can itself become a deemed dividend.

Why this is worth your attention right now

The reason this matters at the moment is timing. As the 2025 to 2026 company tax returns are being prepared and lodged, any money drawn from your company during that year needs to be either repaid or properly documented before the return goes in. Once it is lodged, the window to fix a Division 7A problem cleanly has usually closed, and the options that remain are far more limited and far more costly.

One more point worth flagging for anyone with an existing complying loan. The benchmark rate moves each year. It dropped from 8.77 per cent in 2024 to 2025, down to 8.37 per cent for 2025 to 2026, and has since returned to 8.77 per cent this year. That means your minimum yearly repayment can shift from one year to the next, so it is worth recalculating rather than assuming last year’s figure still holds.

This is one of those areas where a quiet review well before lodgement can save you a genuinely large amount of tax. At TSP we regularly work through clients’ loan accounts, sort out the documentation, calculate the correct repayments and make sure nothing is quietly ticking away toward a deemed dividend. If you have taken money out of your company this year, or you are simply not certain where your loan account stands, it is a conversation well worth having before your return is lodged.

Before you lodge your 2025 to 2026 company tax return If you drew money from your company during the year, that loan needs to be repaid or placed under a complying Division 7A agreement first. Once the return is lodged, your options narrow considerably. Talk to TSP before you lodge, not after.

Frequently Asked Questions

What is a Division 7A loan?

A Division 7A loan is money a private company lends to a shareholder or an associate of a shareholder. Under Division 7A of the tax law, if the loan is not repaid or properly documented, the ATO can treat it as an unfranked deemed dividend and tax it in the borrower’s hands.

Who does Division 7A apply to?

It applies to private (proprietary) companies and their shareholders, along with associates of those shareholders such as spouses, family members, family trusts and related companies. If you own and operate through a private company, it almost certainly applies to you.

What counts as a Division 7A loan besides an actual loan?

Division 7A can also apply when your company pays a personal expense for you, allows you to use a company asset privately, or forgives a debt you owe it. Amounts routed through an interposed entity such as a trust can be caught as well.

What is the Division 7A benchmark interest rate for 2026 to 2027?

The ATO benchmark interest rate for the 2026 to 2027 income year is 8.77 per cent. This is the minimum rate a complying loan agreement must charge. The rate is reset each year, so existing loans should be checked annually.

How do I stop my loan being treated as a dividend?

You have two main options. Repay the loan in full before your company’s lodgement day, or place it under a complying written Division 7A loan agreement before that day and then make the required minimum yearly repayment each 30 June.

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

An unsecured complying loan can run for up to seven years. A loan secured by a registered mortgage over real property can run for up to twenty five years, provided the loan meets the security conditions.

What happens if I miss a minimum yearly repayment?

If you do not make the full minimum yearly repayment by 30 June, the shortfall can be treated as an unfranked deemed dividend for that year, which means it is added to your taxable income without franking credits.

Can I fix a Division 7A problem after lodging my company return?

Once the return is lodged your options are much more limited. The ATO does have a discretion to disregard a deemed dividend in limited circumstances, but relying on it is risky and far from guaranteed. It is much safer to deal with the loan before the return is lodged.

David Apps | BCom, CA
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