Division 7A Loans: What Every Director Must Know

If you've ever withdrawn money from your company for personal use — to buy a car, pay a credit card, or cover a deposit on a house — you need to understand Division 7A. Without a compliant loan agreement, the ATO treats that withdrawal as a deemed unfranked dividend, taxed at your full marginal rate with no franking credits. In 2026, with proposed reforms on the horizon, getting this right is more important than ever.

1. What Is Division 7A?

Division 7A of the Income Tax Assessment Act 1936 prevents private company shareholders and associates from accessing company profits tax-free through:

• Loans from the company to shareholders, directors, or their relatives.
• Payments made by the company on behalf of a shareholder (e.g., paying your personal credit card).
• Debt forgiveness — if the company writes off a loan you owe.
• Use of company assets — using the company car or property for personal purposes without paying market rent.

2. The Deemed Dividend Trap

If you take money from the company and don't have a compliant loan agreement in place by the lodgment date of the company's tax return, the entire amount is treated as an unfranked dividend. This means:

• You pay tax at your marginal rate (up to 47% including Medicare levy).
• You get no franking credits to offset the tax the company already paid.
• The company doesn't get a deduction for the "dividend."

On a $100,000 withdrawal, that could mean a tax bill of $47,000 — with zero benefit.

3. How to Set Up a Compliant Div 7A Loan

To avoid the deemed dividend, you must put a written loan agreement in place that meets these conditions:

1. Maximum term: 7 years (unsecured) or 25 years (secured against real property).
2. Interest rate: At least the ATO's benchmark rate (published each May for the following year). For 2025–26, this is approximately 8.27%.
3. Minimum yearly repayments: Calculated using the ATO's formula based on the loan amount, interest rate, and remaining term.
4. Agreement must be in writing and executed before the company's tax return lodgment date.

4. Minimum Yearly Repayments

You must make minimum repayments each financial year. If you miss the minimum, the shortfall is treated as a deemed dividend. Example for a $200,000 unsecured loan:

5. Common Div 7A Mistakes

• No written agreement — a verbal understanding isn't enough.
• Using an old interest rate — the benchmark rate changes annually.
• Missing the minimum repayment by even $1 triggers a deemed dividend on the shortfall.
• Paying personal expenses from the company account without recording them as Div 7A loans.
• Trust distributions to a company — UPEs (unpaid present entitlements) from trusts can also trigger Div 7A if not managed correctly.

6. Proposed 2026 Reforms

The government has signalled reforms to simplify Division 7A, including a single 10-year loan term and potentially lower interest rates. However, until legislation passes, the current rules apply in full. We'll update our clients as soon as changes are enacted.