If you run your business through a company and have ever taken money out of it that was not salary or a dividend, Division 7A applies to you. It is the most common problem we find when a new business client brings in their books. This guide explains what a Division 7A loan is, the 2026-27 benchmark interest rate, how a complying loan agreement works, and how to fix a problem before the ATO finds it.
What Division 7A does
A private company’s profits are taxed at the company rate (25% for most small companies). If a shareholder or their associate could simply take that money out as a loan, they would avoid paying personal tax on it. Division 7A of the Income Tax Assessment Act 1936 stops this by treating certain payments, loans and forgiven debts from a private company to a shareholder or associate as an unfranked dividend, taxable in the hands of the recipient at their marginal rate, with no franking credit for the tax the company already paid.
Associates include spouses, children, family trusts and other companies the shareholder controls. The rules also catch a company’s unpaid distributions from a trust in some circumstances, and loans made through an interposed entity.
Common situations that trigger it
- Drawing money from the company account for personal expenses and recording it as a “director’s loan”
- The company paying a private bill, such as a home mortgage, car or holiday
- Using a company-owned asset, such as a boat or holiday house, for free
- The company lending money to a family trust or a related company that then pays it to the shareholder
- Writing off or forgiving a debt owed by a shareholder
How to avoid a deemed dividend
A loan does not become a deemed dividend if, before the company’s lodgement day (the earlier of the due date and the actual lodgement date of the company’s tax return for that year), it is either repaid in full or put under a complying written loan agreement. A complying agreement must:
- Be in writing and signed before the lodgement day
- Charge interest at or above the ATO benchmark rate for each year
- Have a maximum term of 7 years for an unsecured loan, or 25 years if secured by a registered mortgage over real property worth at least 110% of the loan
- Require a minimum yearly repayment of principal and interest, worked out with the ATO’s formula, starting in the year after the loan is made
Benchmark interest rate
| Income year | Division 7A benchmark rate |
|---|---|
| 2026-27 | 8.77% |
| 2025-26 | 8.37% |
| 2024-25 | 8.77% |
The rate is set each year from the RBA’s indicator rate for standard variable housing loans. The interest charged on a Division 7A loan is income for the company and, unless the borrowed money was used to produce assessable income, is not deductible to the shareholder. A 7-year loan at 8.77% is expensive money, which is why repaying the loan with a franked dividend is often the better path.
Repaying with a dividend
The most common way to make the minimum yearly repayment is for the company to declare a franked dividend to the shareholder and set it off against the loan balance. The shareholder declares the dividend and the franking credit in their personal return. Repayments made with money that is then re-borrowed from the company do not count. The company also needs enough retained profits and franking credits to do this, which is why year-end planning matters.
Distributable surplus
A deemed dividend is capped at the company’s distributable surplus, broadly its net assets less paid-up capital, measured at the end of the year. A company with little or no retained profit may have a small or nil deemed dividend, but relying on this is risky because the ATO can review the valuation of the company’s assets.
If you already have a problem
Where a loan was not put under a complying agreement in time, the ATO can exercise its discretion to disregard the deemed dividend if the failure was an honest mistake or inadvertent omission and the parties take corrective action, usually by putting a complying agreement in place and catching up the repayments. The request is made in writing with a full explanation, and the chances are much better if you approach the ATO before an audit does.
Frequently asked questions
Does Division 7A apply to a sole trader or partnership?
No. It applies to private companies, and to trusts in limited situations where a company is entitled to a trust distribution that is left unpaid.
What if the company lends money to me and I lend it back?
Repayments funded by new borrowings from the same company are ignored, so the loan balance is treated as never having been repaid.
Can the loan be interest free in the first year?
Interest and the first minimum repayment are required from the income year after the loan is made, so a loan made in 2026-27 needs its first repayment in 2027-28, calculated at that year’s benchmark rate.
Division 7A help in Melbourne’s west
Kennedy Tax & Business Services reviews company and trust accounts for Division 7A exposure, prepares complying loan agreements and dividend documentation, and plans year-end repayments. See our company tax return guide and tax planning and structuring service, or contact our Footscray or Williams Landing office.
This article is general information only and does not take into account your personal circumstances. Benchmark rates are from the ATO. Speak to a registered tax agent before acting.
