Tax & ATO
What is Div 7A?
Division 7A
Division 7A is an anti-avoidance rule in the tax law that stops private company owners taking company money tax-free as informal loans. A payment or loan to a shareholder or their associate that is not repaid or put on a complying loan agreement by lodgement day is taxed as an unfranked deemed dividend.
How Division 7A works
A private company's profits belong to the company and are only meant to reach the owners as salary (taxed as wages) or dividends (usually franked). Division 7A of the Income Tax Assessment Act 1936 polices the third path: simply drawing money out. If a private company pays an amount to, lends to, or forgives a debt of a shareholder or an associate (spouse, family member, related trust), and the amount is not dealt with properly by the company's lodgement day (the earlier of the due date and actual lodgement of that year's return), the amount is deemed an unfranked dividend, assessable to the recipient with no franking credit attached, capped at the company's distributable surplus.
Dealing with it properly means either repaying the amount in full, or executing a written complying loan agreement: minimum interest at the ATO's published Division 7A benchmark rate, and a maximum term of 7 years unsecured, or 25 years if secured by a registered mortgage over real property with adequate loan-to-value cover. Minimum yearly repayments of principal and interest are then required each year. The ATO Division 7A pages publish the benchmark rate (8.77% for 2024-25; check the current year's rate there) and a repayment calculator.
Why it matters for small business
Division 7A is the tax problem most likely to ambush a profitable one-or-two-director company. The classic pattern: the business has a good year, the owner draws living costs from the company account all year, and the bookkeeper posts it all to a director's loan account. Nothing feels wrong until the accountant explains that the loan balance must be repaid or put on complying terms by lodgement day, or the whole amount is taxed in the owner's hands as an unfranked dividend, meaning marginal rates up to 47% on money the company already paid up to 30% tax on, with no franking credit for relief.
The rules reach further than direct loans. Using company assets privately (the company-owned boat or holiday house) can be a deemed payment; company guarantees of shareholder borrowings can be caught; and unpaid present entitlements from a trust to a corporate beneficiary have been treated by the ATO as Division 7A loans, an area where the law has been contested in the courts, so current advice matters. The safe patterns are boring and effective: pay wages or directors' fees through payroll with PAYG withheld, declare franked dividends properly, document any loan on complying terms before lodgement day, and never treat the company account as a personal wallet.
Worked example: fixing a $100,000 shareholder loan
Say your company lends you $100,000 during 2025-26 to help buy a home, and the company's 2025-26 return is due 15 May 2027. You have three clean options before that lodgement day.
- Repay it in full. No deemed dividend arises. Repayments must be genuine: repaying in June and redrawing the same money in July is ignored under the anti-avoidance rules.
- Put it on a complying 7-year loan. Sign a written agreement at the ATO benchmark interest rate before lodgement day. From the following year you make minimum yearly repayments of principal plus interest, roughly $19,000 to $20,000 a year on $100,000 at recent benchmark rates. The interest is assessable income to the company and generally not deductible to you if the money bought a private home.
- Declare a franked dividend. If the company has franking credits, paying the amount out as a franked dividend puts the cash in your hands with a credit for company tax already paid, often cheaper overall than an unfranked deemed dividend.
Do nothing and the full $100,000 is an unfranked dividend in your 2025-26 assessment: at a 39% marginal rate (including Medicare levy) that is $39,000 of tax, avoidable with paperwork signed on time.
Free tools for Div 7A and beyond
OneBookPlus publishes free Australian small business calculators for GST, BAS, PAYG, super and more, no sign-up needed.
Div 7A frequently asked questions
Does Division 7A apply to sole traders or trusts?
Not directly: it targets private companies. Sole traders can draw business profits freely because the profits are already taxed in their own name. Trusts get pulled in indirectly, most commonly when a trust owes a distribution to a corporate beneficiary (an unpaid present entitlement) or when a company lends to the trustee; both can trigger Division 7A consequences, so trust-plus-bucket-company structures need annual attention.
What is the Division 7A benchmark interest rate?
The minimum interest rate a complying Division 7A loan must charge, published by the ATO each year and based on the RBA's standard variable housing loan indicator rate. It was 8.77% for 2024-25; the ATO's Division 7A page lists the current year's rate. Charging less than the benchmark on a complying loan causes a shortfall that is itself treated as a deemed dividend.
Are directors' drawings the same as a Division 7A loan?
Money a director takes from a private company that is not salary through payroll or a declared dividend is, by default, a loan to a shareholder or associate, and Division 7A applies. Regular drawings are fine only if they are cleared by lodgement day: repaid, converted to wages (with PAYG withholding and super where required), declared as dividends, or documented on a complying loan agreement.
Last reviewed and updated: by Bishal Shrestha