Division 7A: taking money out of your company without a tax surprise

A company's money is not its director's money, even when the director owns every share. Draw on it the wrong way and Division 7A can turn the amount into a taxable dividend with no franking credit. The rules are mechanical, the deadlines are firm, and most of the pain is avoidable with a written agreement and a calendar.

What Division 7A is and why it exists

Division 7A sits in Part III of the Income Tax Assessment Act 1936. Its purpose is to stop private companies passing profits or assets to shareholders, or their associates, free of tax. A company pays tax at the company rate; a shareholder on the top marginal rate pays considerably more. Without Division 7A, a director could "borrow" retained profits indefinitely and never pay the difference. The division closes that gap by treating certain payments, loans and forgiven debts as dividends for tax purposes, regardless of what the parties called them.

An "associate" is wide. It takes in a shareholder's spouse, children and other relatives, partnerships they are in, trusts they or their family can benefit from, and companies they control. A loan from your company to your family trust is squarely within scope.

What counts

The ATO lists the transactions Division 7A may apply to. The main categories are:

• Payments — including the transfer of a company asset to a shareholder or associate, and the private use of a company asset (a boat, a holiday unit, a vehicle) whether under a formal lease or an informal "just use it" arrangement.
• Loans and other forms of credit — the classic director's loan account in debit, but also advances and the provision of credit.
• Debt forgiveness — writing off an amount a shareholder or associate owes the company.
• Gifts and guarantees, loans routed through interposed entities, and payments or loans by a trust where a private company has an unpaid present entitlement.

Where a benefit is provided to someone in their capacity as an employee rather than as a shareholder, fringe benefits tax may apply instead. Which regime applies turns on the facts, and the answer is not always obvious for a working director.

Deemed dividends and franking

If Division 7A applies, the amount is included in the recipient's assessable income as a dividend. The ATO's guidance is that a Division 7A dividend is generally unfranked, so the whole amount is taxed in the shareholder's hands without the credit a normal franked dividend would carry. The company has already paid tax on those profits; the shareholder now pays again. That double layer is the "tax surprise" in the title.

The law gives the Commissioner a discretion, under section 109RB, to disregard a deemed dividend or allow it to be franked where the breach came from an honest mistake or inadvertent omission. It is a relief valve, not a plan, and it has to be applied for.

The complying loan route

A loan escapes deemed-dividend treatment if it is on complying terms. The ATO sets out four requirements:

• A written agreement in place before the company's lodgment day for the income year in which the money was paid. There is no prescribed form, but the agreement should identify the parties, the amount, the interest rate, the term and the repayment obligations.
• Interest at or above the benchmark rate for every year of the loan. The benchmark rate is updated annually; a fixed rate written into the agreement must not fall below it.
• Maximum term of 7 years for an unsecured loan, or 25 years where the loan is fully secured by a registered mortgage over real property whose market value (net of prior-ranking liabilities) is at least 110% of the loan when the loan is first made.
• Minimum yearly repayments of principal and interest in each income year after the year the loan is made, paid by 30 June of that year. Any shortfall is treated as a dividend in that year.

Loans made to the same person in the same year are amalgamated and the minimum repayment is worked out on the combined balance. Repayments made before lodgment day for the loan year are treated as made in that year and reduce the balance carried forward. The ATO's Division 7A calculator handles the arithmetic; we use it for every client with a loan on foot.

The lodgment-day deadline

The single most important date in Division 7A is the company's lodgment day: the earlier of the due date for the company's tax return and the day the return is actually lodged. A payment or loan is not treated as a dividend if, by that day, it has been fully repaid or converted into a complying loan. That gives a window after 30 June to tidy up a loan account before the return goes in — but only if the repayment or the signed agreement genuinely exists by then. Backdating a document is not a fix; it is a false record.

Two cautions. First, lodging early brings lodgment day forward. Second, repaying a loan just before lodgment day and redrawing it shortly after can be disregarded by the ATO where the repayment was never meant to stick.

Unpaid present entitlements to trusts

For years the ATO treated a trust's unpaid distribution to a corporate beneficiary as a potential Division 7A loan. That position was tested in Commissioner of Taxation v Bendel, which reached the High Court in 2026. The ATO has since published a decision impact statement, and its trust entitlements page carries a notice that the content is under review.

The ATO's statement says that no loan arises for Division 7A purposes where a private company beneficiary does nothing in respect of its entitlement to trust income. It goes on to say that any dealing with those funds amounting to a payment or loan to, or forgiveness of a debt of, a shareholder of the corporate beneficiary or their associate may attract Subdivision EA, and that if the entitlement arose from a reimbursement agreement, section 100A may apply to tax the trustee at the top marginal rate. The ATO also says it is reviewing its guidance products and may issue further guidance. We describe only what the ATO page currently says; expect it to move, and do not restructure around the decision without advice.

Common mistakes

• Paying private expenses — school fees, the mortgage, a car — straight from the company account and leaving them in a loan account.
• No written agreement, or one signed after lodgment day.
• Interest set once and never checked against the current benchmark.
• Minimum repayments made by journal entry with no cash, dividend or wage behind them.
• Treating a 25-year term as available without a registered mortgage that meets the 110% test.
• Forgetting that a trust the family controls is an associate.

What SMT does

Before the company return is lodged we reconcile every shareholder and associate loan account, calculate minimum repayments with the ATO tool, and set out the options: repay, declare a franked dividend to clear the balance, or document a complying loan. We diarise lodgment day and the 30 June repayment date, and we flag trust entitlements to corporate beneficiaries as a separate agenda item each year. This is part of our business and company tax work and our tax planning conversations before year end.

Sources

• ATO — Private company benefits: Division 7A dividends
• ATO — Payments and other benefits affected
• ATO — Loans by private companies
• ATO — Division 7A benchmark interest rate
• ATO — Managing Division 7A risks, and corrective action
• ATO — Bendel case: decision impact statement
• ATO — Trust entitlements (under review)