Division 7A Explained: What Happens When You Take Money Out of Your Company
Updated: 6 days ago
Many business owners treat the company bank account like their own wallet. They pay a personal credit card from it, transfer money for a holiday, or borrow funds for a house deposit. It feels harmless, because it is your company.
For tax purposes, though, a company is a separate legal entity. When a private company gives money or benefits to a shareholder (or someone connected to them) without the right paperwork, Division 7A can treat that amount as a dividend. That deemed dividend is generally unfranked, so no franking credits are attached.
This guide explains what Division 7A is, what triggers it, how to keep a loan compliant, and the mistakes we see most often in Perth businesses.
What Is Division 7A?
Division 7A is an integrity measure in the Income Tax Assessment Act 1936. It exists to stop private companies from making tax-free distributions to shareholders or their associates.
Without these rules, an owner could leave profits in the company (taxed at the company rate), then “borrow” the money personally and never repay it, avoiding personal tax altogether.
What Counts as a Division 7A Payment?
Division 7A is not limited to cash loans. It can apply when a private company makes a payment or loan to a shareholder or associate, or forgives a debt they owe. It can apply even if the parties call the transaction something else, such as an advance, a gift or a debt write-off.
Common scenarios in small business include:
Withdrawing money from the company account with no record of salary, dividend or loan
The company paying personal expenses, such as school fees, holidays or a personal credit card
A director’s loan account that stays in debit year after year
Use of company assets for private purposes in some circumstances
A trust that has allocated income to a private company but not actually paid it, where the trust has then provided a benefit to the company’s shareholder or their associate
The definition of an “associate” is very broad. For an individual shareholder it can include relatives, a partner, a trustee of a trust under which they benefit, or a company they control.
What Is a Deemed Dividend and Why Does It Matter?
If a loan isn’t repaid or put on complying terms before the company’s lodgment day, the amount can be treated as a dividend, and the shareholder must include it in their tax return as an unfranked dividend.
In practical terms, it is taxed at your marginal tax rate (plus the Medicare levy) with no franking credit offset.
The total of all Division 7A dividends for a year is limited to the company’s distributable surplus. Don’t rely on this limit without advice, as working it out is not straightforward.
The problem can also be expensive because the cash has usually been spent already, leaving nothing to pay the extra tax.
How to Keep a Shareholder Loan Compliant
A loan from a private company to a shareholder or associate may be treated as a Division 7A dividend unless, by the lodgment day, it is either a complying loan or has been repaid.
A company’s lodgment day is the date it actually lodges its tax return or the due date for lodgment, whichever is earlier.
Option 1: Repay the loan by lodgment day
If the loan is fully repaid by lodgment day, Division 7A generally does not apply to it. Be careful with arrangements where the money simply comes back to you afterwards, and get advice before relying on this approach.
Option 2: Put the loan on complying terms
All of the following must be satisfied for a complying loan:
A written loan agreement in place before the company’s lodgment day for the income year in which the loan was paid.
Interest for each year of the loan that is at least the Division 7A benchmark interest rate.
A maximum term of 7 years for most loans. A term of up to 25 years is available only where 100% of the loan is secured by a registered mortgage over real property, and the property’s market value (after deducting any liabilities ranking ahead of the loan) is at least 110% of the loan amount when it is made.
Minimum yearly repayments made in the following income years, by 30 June of the year each repayment is due.
There is no prescribed format for the agreement, but as a minimum it should identify the lender and borrower, set out the key terms (amount, drawdown date, minimum yearly repayments, interest rate and term), and be signed and dated by the lender. The interest charged must also be included in the company’s assessable income for the year.
The Division 7A Benchmark Interest Rate
The ATO’s Division 7A benchmark interest rate is updated annually. The rate for each income year is based on the Reserve Bank of Australia’s published variable housing rate before that year starts, and it remains fixed for the entire financial year.
Because this rate changes every year, applying the wrong interest rate to your loan minimum repayments can easily trigger a deemed dividend. To check the exact benchmark rate for the current financial year, you can visit the ATO website or contact our team at Gordon Du & Associates to calculate your exact minimum yearly repayment.
A Simple Illustration
Here is a general example, not a quote or advice.
Suppose a company lends a shareholder $100,000 on complying terms, with seven years remaining at the start of the year. Based on the current benchmark rate, the minimum repayment for that year would include both principal and interest components. These figures change every year as the ATO rate and your loan balance change. You can check your own numbers with the ATO’s Division 7A calculator or let our Perth team run the exact amortization schedule for you.
What Happens If You Miss a Repayment?
If a minimum yearly repayment isn’t fully made in any year, the shortfall is treated as a Division 7A dividend in that year. That means a loan that started out compliant can still create a tax bill later if repayments slip.
Common Division 7A Mistakes
Most Division 7A problems are not aggressive tax planning. They are simple oversights:
No written agreement in place before lodgment day
Interest charged below the benchmark rate, or not charged at all
Missing the minimum yearly repayment by 30 June
Letting the director’s loan account sit in debit. Division 7A dividends can arise simply because private and company expenses weren’t kept separate.
Poor bookkeeping, which makes it hard to show what was salary, dividend, loan or repayment
Overlooking trust arrangements, such as unpaid trust distributions to a company
Assuming it only applies to cash. Forgiven debts and certain payments are also caught.
In some cases, the Commissioner has a discretion (section 109RB) to disregard a deemed dividend, or allow it to be franked, but only where you can show the breach was an honest mistake or inadvertent omission. It is not a guaranteed way out, so it should never be your plan.
Practical Ways to Reduce Your Risk
Decide before you withdraw. Is the money salary, a dividend or a loan? The ATO notes that paying a normal dividend, with a franking credit if available, is generally the most effective way to provide a benefit to a shareholder.
Keep business and personal spending separate. A dedicated personal account and card makes life much easier.
Review the director’s loan account before the end of each financial year, and again before the company return is lodged.
Put the paperwork in place early, including the loan agreement and a repayment schedule.
Get advice before restructuring or selling. Division 7A can come up in company sales, trust distributions and family arrangements.
Related reading: If you’re still deciding how to structure your business, see Sole Trader vs Company vs Trust. If your company owns a vehicle, you may also want to read about Fringe Benefits Tax on company cars.
Frequently Asked Questions
What is Division 7A in simple terms?
It is a tax rule that stops private company owners from taking company money as loans or payments without paying tax on it. If the amount isn’t repaid or put on proper loan terms by lodgment day, it can be taxed as an unfranked dividend.
Does Division 7A apply to my company?
It is aimed at private (proprietary) companies that make payments, loans or debt forgiveness to shareholders or their associates. Whether it applies to a particular transaction depends on the facts, so ask your accountant.
What is the current Division 7A benchmark interest rate?
The ATO updates the benchmark interest rate every income year based on the RBA variable housing rate. Please consult your accountant or check the ATO website for the current year's exact percentage.
How long can a Division 7A loan last?
Generally up to 7 years. A term of up to 25 years is available only if the loan is fully secured by a registered mortgage over real property and the property’s value meets the ATO’s 110% test.
What happens if I miss a minimum yearly repayment?
The shortfall is treated as a Division 7A dividend in that year, taxed at your marginal rate with no franking credits. Speak to your accountant promptly if a repayment has been missed.
What is “lodgment day”?
It is the earlier of the company’s tax return due date and the date the return is actually lodged, for the year the loan or payment was made.
Does a director’s loan always need a written agreement?
If the loan isn’t repaid by lodgment day and you want it treated as a complying loan, a written agreement must be in place before that date.
Need Help With Your Company Loan Account?
Division 7A is easy to get wrong and expensive to fix. Our Perth team can review your director’s loan account, prepare loan agreements and set up repayment schedules, so you know where you stand before the end of the financial year.
Explore our accounting services, bookkeeping and business advisory support for Perth businesses.
Disclaimer: This post contains general information only and does not constitute specific tax or financial advice. Please consult a registered tax agent regarding your specific circumstances.
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