If you run a company and have ever taken cash out of it, paid a personal expense from the business account, or let the company cover something for a family member, there is a decent chance Division 7A applies to you, whether you have heard of it or not. It is one of the most common ways business owners accidentally trigger extra tax, and it is entirely avoidable if you know the rules.
Division 7A of the tax law is an anti-avoidance rule aimed at private companies. If your company lends money to a shareholder or an associate of a shareholder, and that loan is not properly documented and repaid, the ATO can treat it as an unfranked dividend, taxed at your marginal rate, even though no dividend was ever formally declared. The logic is straightforward: the ATO does not want business owners using their company as a tax-free personal bank account.
The most common ways this happens are rarely deliberate. Drawing cash from the company through the loan or drawings account without documenting it. The company paying for something personal, school fees, a mortgage payment, a family holiday. Using a company-owned asset, a property, car or boat, for personal purposes, even occasionally. Forgiving or writing off a loan the company made to a shareholder. And a less obvious one: a trust distributing income to a corporate beneficiary but never actually paying it, known as an unpaid present entitlement, or UPE.
None of this is a problem if it is handled properly before the company's tax return is lodged. Your main options are:
The benchmark interest rate for the year ending 30 June 2026 is 8.37%, rising to 8.77% for the year ending 30 June 2027. A complying loan can run for a maximum of 7 years unsecured, or up to 25 years if it is secured by a registered mortgage over property worth at least 110% of the loan.
This is a genuinely current and evolving area. For years, the ATO treated an unpaid entitlement owed by a trust to a corporate beneficiary as a deemed Division 7A loan. In June 2026, the High Court ruled against the ATO on this point in Commissioner of Taxation v Bendel, finding that a UPE is not automatically a loan under Division 7A unless there is an actual repayment obligation. That is a significant shift in the law, and a legislative fix is expected. In the meantime, the ATO is more likely to lean on other provisions, including Section 100A, to challenge arrangements it considers artificial, so this is not a reason to stop documenting these arrangements properly.
Worried you might already have an undocumented loan sitting in your company's accounts? Book a free call and we will help you work out where you stand before your return is lodged.
Treating the company like a personal account. Every dollar that moves between the company and a shareholder needs to be classified as wages, a dividend, or a properly documented loan.
Fixing it after lodgment. A complying loan agreement has to be in place before the company's tax return is lodged for the year the loan was made. After that, it is too late to fix retrospectively.
Forgetting associates. Division 7A does not just apply to the shareholder personally. It also catches spouses, relatives, and other related entities.
Ignoring minimum repayments. Once a complying loan is in place, missing the minimum yearly repayment can itself trigger a deemed dividend for the shortfall.
Division 7A turns undocumented cash flowing from your company to you or an associate into a taxable dividend. The fix is simple in principle: document it as a loan with proper terms, pay it as wages or a dividend, or repay it, all before your company's tax return is lodged. The current benchmark rate is 8.37% for FY25-26, rising to 8.77% for FY26-27.
We review Division 7A exposure as part of our company and trust compliance work, with fixed fees agreed upfront. Book your free call here.
This article is general information only and does not take into account your personal circumstances. Please seek advice tailored to your situation before acting.
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