If you run a company and take money out for personal use, Division 7A is something you need to understand. It is an integrity rule aimed at stopping private company profits being extracted by shareholders or their associates without the correct tax outcome. It can apply to loans, payments, debt forgiveness, and in some cases arrangements involving trusts.
What is Division 7A?
In simple terms, Division 7A can treat certain amounts taken from a private company as an unfranked dividend for tax purposes, even if the transaction was originally recorded as a loan or some other balance sheet movement. That means a director or shareholder loan account is not automatically “safe” just because it is sitting in the books as a loan.
When does it usually become a problem?
Common examples include:
- a shareholder or director taking money out of the company for private purposes
- the company paying personal expenses on behalf of a shareholder or associate
- a company forgiving a debt owed by a shareholder or associate
- unpaid trust entitlements and related trust/private company arrangements in certain cases
These are the kinds of private company benefit arrangements the ATO continues to focus on.
Can a loan be made compliant?
Yes. A loan can generally avoid a deemed dividend outcome if it is put on a complying Division 7A loan agreement by the relevant deadline and the borrower then meets the minimum yearly repayment requirements. The ATO provides a calculator and decision tool specifically for this purpose.
Broadly, the standard maximum term is:
- 7 years for an unsecured complying loan
- up to 25 years where the loan is secured by a registered mortgage over real property and the other conditions are met
Interest rate matters
A complying Division 7A loan must use at least the benchmark interest rate set for that income year. For the 2025–26 income year, the ATO benchmark rate is 8.37%. That rate can change each year, so it is important not to reuse last year’s figure without checking.
What the ATO is looking at
The ATO has made it clear that private company benefits, including Division 7A, remain an area of focus. Issues that attract attention include using company funds or assets for private purposes, failing to make minimum yearly repayments, and not properly reporting interest income on Division 7A loans. The ATO has also encouraged groups to maintain a documented Division 7A register to track loans, repayments, and asset usage.
Practical warning signs
Division 7A risk often shows up in everyday bookkeeping, such as:
- large or recurring debit balances in the director’s loan account
- company-paid private expenses
- year-end journals moving drawings around without real repayment
- loans being “repaid” using circular or replacement arrangements
- trust/company structures where cash movements do not match the accounting records
The ATO has recently issued additional guidance around arrangements designed to sidestep Division 7A outcomes, so cosmetic fixes at year end can be risky.
What business owners should do now
If you have a private company, a good review before year end should include:
- checking whether any shareholder or associate has borrowed from the company
- reviewing the director’s loan account for private drawings or company-paid personal costs
- confirming whether a complying loan agreement is needed
- calculating the minimum yearly repayment
- making sure interest is correctly recorded and reported
- documenting the position properly rather than relying on informal notes or late journals
That kind of review is usually far cheaper than dealing with a deemed dividend problem after lodgment.
Final thought
Division 7A is one of the most common tax risk areas for private companies because the issue often starts with ordinary business cash flow behaviour rather than deliberate tax planning. If you are using company funds personally, carrying a director’s loan balance, or operating through a company-and-trust structure, it is worth reviewing the position early.
Need help reviewing your director’s loan account or setting up a complying Division 7A loan? Linix Accountants can help you assess the position and deal with it before it becomes a bigger tax issue.
