Division 7A explained: taking money out of a private company

Benchmark interest rate

8.77% for the income year ending 30 June 2027 (2026–27)

Previous rate

8.37% for the income year ending 30 June 2026 (2025–26)

Maximum loan term

7 years unsecured, 25 years if secured by a registered mortgage over real property

Deadline

Repay or put under a written agreement before the company's lodgment day

What Division 7A is and why it exists

Division 7A is part of the Income Tax Assessment Act 1936. Its purpose, as the ATO describes it, is to stop private company profits or assets reaching shareholders and their associates without tax being paid on them.

A private company is a separate legal entity, even when one person is the only shareholder and director. Money in the company bank account belongs to the company. Taking it out in a way the tax law does not otherwise recognise, such as an informal loan, a gift or the private use of a company asset, can lead to Division 7A treating the amount as a dividend paid to that person.

That deemed dividend is generally unfranked, so the recipient pays tax on it at their marginal rate with no credit for the company tax already paid. For this reason, the ATO suggests that paying a normal dividend, with franking credits attached where available, is generally a more effective way to pass a payment or benefit to a shareholder or associate.

Amounts that are already assessable income under another part of the tax law, such as wages, director's fees or normal dividends, are not caught by Division 7A.

Who and what Division 7A covers

Division 7A applies to shareholders of a private company and to their associates. The ATO notes that associates are defined broadly. For an individual shareholder they can include a spouse, children and other relatives, a company the shareholder or an associate controls, and the trustee of a trust the shareholder or an associate can benefit from.

According to the ATO, the transactions that can be caught include:

• Payments, which include transferring a company asset or letting a shareholder or associate use one privately, such as a car, holiday home or boat, whether or not there is a formal lease.
• Loans, read widely to include advances of money, credit, other financial accommodation, and paying a personal bill where the shareholder must repay it.
• Debt forgiveness, where the company writes off an amount owed by a shareholder or associate.
• Guarantees and payments or loans routed through interposed entities, where the shareholder or associate is the real target.
• Payments or loans by a trust to a shareholder or associate where a private company beneficiary has an entitlement to trust income that has not been paid.

Division 7A applies regardless of what the money is used for, including a business or investment purpose. If you run your business through a company and a family trust, the interaction between the two needs particular care.

Unpaid trust entitlements and the Bendel decision: in Commissioner of Taxation v Bendel [2026] HCA 18 (judgment 10 June 2026), the High Court found that a company beneficiary simply leaving its trust entitlement unpaid is not, by itself, a loan for Division 7A purposes. The ATO has said it will withdraw its earlier determination on this point and is reviewing its guidance. It also notes that other rules, including Subdivision EA and section 100A, may still apply, and that entitlements already converted into complying loans remain loans.

The lodgment day deadline

A loan from a private company to a shareholder or associate is treated as a dividend at the end of the income year in which it is made if it has not been fully repaid, or put under a complying loan agreement, before the company's lodgment day for that year. The ATO defines lodgment day as the earlier of the due date for the company's tax return and the date it is actually lodged.

This gives some breathing space: a loan taken during 2026–27 does not have to be dealt with by 30 June 2027, but it does need to be sorted out before the company's 2026–27 return is lodged. Lodging the return early brings the deadline forward. Payments other than loans, such as paying a shareholder's private expenses, can also be converted into a complying loan before lodgment day.

The total of Division 7A dividends a company is taken to pay in a year is capped at its distributable surplus, a figure based on the company's net assets. Some loans are excluded altogether, for example loans to another company (not acting as a trustee), and loans made in the ordinary course of business on the same terms the company offers arm's length customers.

What makes a complying loan agreement

The ATO sets out three requirements for a loan to be a complying loan and so avoid being treated as a dividend in the year it is made.

A single written agreement can be drafted to cover loans made over several future income years. Where a shareholder borrows more than once in a year under complying terms with the same maximum term, the loans are combined into one amalgamated loan for working out repayments.

The benchmark interest rate

The benchmark interest rate for an income year is the Reserve Bank of Australia's standard variable owner-occupier housing loan rate for banks, as last published before that income year starts. It is fixed for the whole year, even if the Reserve Bank later revises its figure.

The 2026–27 rate of 8.77% is based on the Reserve Bank figure published on 5 June 2026. These rates are for companies with a 30 June year end. A company with a substituted accounting period uses the Reserve Bank rate last published before its own income year begins.

Minimum yearly repayments

Once a loan is on complying terms, the borrower has to make a minimum yearly repayment of principal and interest in each income year after the year the loan was made. No repayment is required for the year the loan itself was made. The amount is recalculated every year using that year's benchmark rate, the loan balance at the end of the previous year and the remaining term.

The ATO formula is: repayment equals the loan amount not repaid by the end of the previous income year multiplied by the benchmark rate, divided by one minus (1 divided by (1 plus the rate)) raised to the power of the remaining term. The ATO's Division 7A calculator and decision tool works out the minimum yearly repayment for complying loans and shows the interest and principal parts. It cannot be used by companies with a substituted accounting period.

Illustration for 2026–27

Suppose a company lent a shareholder $100,000 during 2025–26 on a 7-year unsecured complying agreement, and nothing was repaid before the company's lodgment day. Applying the ATO formula with the 2026–27 benchmark rate of 8.77% and a remaining term of 7 years gives a minimum yearly repayment of about $19,716, due by 30 June 2027. The same loan on a 25-year secured agreement would need about $9,992. These figures are illustrations only; the actual amount depends on the loan's own balance, timing and terms.

If a repayment falls short

If the repayments made during the year are less than the minimum, the shortfall can be treated as an unfranked dividend for that year, again limited to the distributable surplus. Under section 109Q, the Commissioner can decide not to treat a shortfall as a dividend if the borrower shows the shortfall happened because of circumstances beyond their control and that a deemed dividend would cause them undue hardship. Separately, under section 109RB the Commissioner can disregard a deemed dividend, or allow it to be franked, where the breach came from an honest mistake or inadvertent omission. The ATO stresses that neither outcome can be assumed.

Common Division 7A traps

The ATO publishes a list of misunderstandings it regularly sees. The main ones are:

• Backdated journal entries: a journal entry only records a transaction, it does not create one. Offsetting a minimum yearly repayment against a dividend works only if both obligations exist at the time, the company and borrower agree to the offset, and this happens by the end of the income year, usually 30 June.
• Repay and reborrow: a repayment can be ignored if a similar or larger amount is borrowed back from the company soon after, or if the repayment was funded with money from the same company. The ATO specifically warns against borrowing company money to sit in a personal mortgage offset account, repaying it before the end of the income year and then borrowing it again.
• Negative net assets: the net assets figure used in the distributable surplus calculation cannot be negative. If liabilities exceed assets, it is treated as zero.
• Using last year's rate: each year's repayment uses that year's benchmark rate, which usually changes.
• Assuming relief: relying on a tax professional's advice does not guarantee the Commissioner will exercise a discretion to disregard a deemed dividend.

Good business record keeping makes most of these problems easy to avoid. Reviewing the director or shareholder loan account before the company's return is prepared is the practical way to catch Division 7A issues while there is still time to act. Our company tax returns service includes a review of shareholder loan accounts, and tax advice and planning or a conversation with us can cover a particular company's position.

Frequently asked questions

General information only, not personal advice. Tax rules change and your circumstances matter, so talk to us before acting. See our disclaimer.