Division 7A catches a move that feels completely natural: taking money out of your own company. It is your business, your profit, your bank account. But the moment a private company lends or pays money to you as a shareholder, or to someone connected to you, the ATO can treat that amount as a dividend you have to pay tax on. Usually an unfranked one, with no credit for the tax the company already paid. Get it wrong and a $100,000 loan can land on your return as $100,000 of income.
The rule exists to stop one thing: pulling profit out of a company tax-free by calling it a loan instead of a wage or a dividend. That is the trap to understand, and it is easy to avoid once you know it is there.
What triggers it
You are in Division 7A territory when a private company:
- lends money to a shareholder or an associate, like family, a related trust or a related company
- pays a shareholder’s private expenses, such as school fees, a mortgage, a car lease or a credit card
- forgives a debt a shareholder owes it
- lets a shareholder use a company asset privately, like a property, a car or a boat
- routes any of the above through an in-between entity such as a trust
“Associate” is broad. It picks up your spouse, your children and your family trust. Lending company money to your spouse counts every bit as much as lending it to yourself.
What it costs if you ignore it
If Division 7A applies and you have not dealt with it, the amount becomes a deemed dividend in your hands for that year. Unfranked, so no franking credit, even though the company already paid 25% or 30% tax on that profit. You are taxed on it at your own marginal rate. The deemed dividend cannot exceed the company’s distributable surplus, but for most small companies that is cold comfort.
The size of it surprises people. A company lends a shareholder $200,000 and nobody puts an agreement in place before the company lodges. The whole $200,000 is treated as an unfranked dividend. At the top rate of 47% that is about $94,000 of tax, on money that was only ever meant to be a loan.
Figure 1. Three outcomes, and you choose which one before the company lodges.
The two ways out
There are two clean fixes, and you have until the company’s tax return lodgment day to use either:
- Repay the loan in full before lodgment day. Gone, no Division 7A.
- Put it on a complying loan agreement: written, signed before lodgment day, charging at least the benchmark interest rate (8.37% for the 2025-26 year), with a maximum term of 7 years unsecured or 25 years if secured by a registered mortgage over real property. Then make a minimum yearly repayment every year by 30 June.
Figure 2. The four things a complying loan agreement must do.
Where people slip
Two timing traps catch people every year. First, the agreement has to exist before lodgment day, not be drawn up later when the return is being prepared. A verbal understanding does not count, and an agreement dated after you lodge does not save that year.
Second, the minimum yearly repayment is due by 30 June. Not 28 days later, not when you lodge. Miss it and the shortfall becomes a deemed dividend for that year, even if you pay it the following week.
Common situations
Situation | Div 7A? | What to do |
Company lends you $50,000, no agreement | Yes | Repay before lodgment day, or put it on a complying loan. |
Company pays your private credit card | Yes | A payment benefit. Same fix, or take it as wage or dividend. |
Company lets you use its investment property | Yes | Use of a company asset. Charge market rent or value the benefit. |
Company forgives a debt you owe it | Yes | A forgiven debt is a deemed dividend. Avoid forgiving it. |
You repay the full loan before lodgment day | No | Keep evidence of the repayment. |
Signed complying loan, repayments made | No | Make the minimum yearly repayment by 30 June. |
“Associate” includes your spouse, children and family trust, so the same rules apply when the money goes to them.
Trusts and the Bendel decision
One area worth flagging, because it just moved. If you run a discretionary trust that distributes income to a company (a corporate beneficiary) and leaves it unpaid, the ATO spent 16 years treating that unpaid present entitlement as a Division 7A loan. On 10 June 2026 the High Court ended that in Bendel, ruling 5 to 2 that an unpaid entitlement is not, by itself, a Division 7A loan. That is a real shift. It is not a free pass: other rules (Subdivision EA, section 100A) can still apply, the ATO’s formal response is still to come, and a separate proposed 30% tax on trust income from 1 July 2028 is on the horizon. If that is your structure, this is the moment to get specific advice, not to assume the problem has disappeared.
The takeaway
Division 7A is one of those rules where the cost of getting it wrong is wildly out of proportion to the effort of getting it right. The fix is a one-page agreement signed on time and a repayment diarised for June. We would far rather see that done early than untangle a deemed dividend after the fact. Tax Assistant runs the structure past a registered tax agent before you lodge. Keep the signed agreement and repayment records with your other tax records; these are exactly the documents the ATO asks to see. And if a return runs late on top of it, there is a penalty for that as well.
Technical reference (current to June 2026)
Legislative basis: Division 7A, Part III of the Income Tax Assessment Act 1936 (Cth). A specific anti-avoidance measure that deems certain loans, payments and forgiven debts by a private company to a shareholder or associate to be dividends.
When it applies
Triggers include a loan (s 109D), a payment (s 109C) or a forgiven debt (s 109F) by a private company to a shareholder or an associate, the private use of company assets, and arrangements through interposed entities (s 109T look-through). The deemed dividend is unfranked and assessable to the recipient at their marginal rate, capped at the company’s distributable surplus (s 109Y).
Complying loan (s 109N)
A written agreement in place before the company’s lodgment day; interest at least the benchmark interest rate; maximum term 7 years unsecured, or 25 years if secured by a registered mortgage over real property where the property value is at least 110% of the loan. A minimum yearly repayment (s 109E) of principal and interest is due by 30 June each year. Benchmark interest rate: 8.37% for 2025-26 (down from 8.77% in 2024-25); 8.77% for 2026-27. The rate is the RBA ‘Housing loans; Banks; Variable; Standard; Owner-occupier’ rate last published before the start of the income year.
Avoiding the deemed dividend
Either repay the loan in full before the company’s lodgment day, or place it on a complying loan by that date. Missing the minimum yearly repayment converts the shortfall into a deemed dividend for that year, even if paid shortly after 30 June.
Unpaid present entitlements (trusts)
Commissioner of Taxation v Bendel [2026] HCA 18 (10 June 2026): the High Court held 5-2 that an unpaid present entitlement owed by a trust to a corporate beneficiary is not, of itself, a loan under s 109D. This overturns the ATO’s long-held position (TR 2010/3, then TD 2022/11). Subdivision EA, section 100A and Part IVA may still apply depending on the facts; the ATO’s Decision Impact Statement is awaited. The 2026-27 Budget proposed a 30% minimum tax on discretionary trust income from 1 July 2028 (announced, not yet law).
Figures are current to June 2026 and can change; confirm the current year’s benchmark rate and rules before acting. This article is general information, not personal tax advice for your situation.
