Division 7A is the rule that stops shareholders taking money out of a private company tax-free. It catches a great many small business owners who had no idea they were doing anything wrong — because from the inside, it just looks like using your own money.
What triggers it
Division 7A applies where a private company provides a benefit to a shareholder or their associate, including:
- Loans — money out of the company that is not salary, wages or a franked dividend
- Payments — including the company paying your personal expenses
- Debts forgiven — writing off what a shareholder owes
- Use of company assets — a company-owned holiday house or boat used privately
- Loans through an interposed entity — routing it via a trust does not fix it
If it is caught and not remedied, the amount is treated as an unfranked deemed dividend in the shareholder’s hands. Unfranked means no credit for the tax the company already paid. You are taxed on the full amount at your marginal rate, on money you have already spent.
Pitfall 1: the loan account nobody looked at
The most common Division 7A problem is the shareholder loan account that quietly grows all year — a car registration here, a school fee there, a transfer to cover a personal bill. Nobody decided to take a loan. The bookkeeping just recorded one.
By 30 June it is a real balance with real consequences, and by then most of your options have narrowed.
Pitfall 2: missing the lodgement day deadline
You can avoid a deemed dividend by putting the loan on complying terms, but the written agreement must be in place before the earlier of the company’s tax return lodgement day and its actual lodgement date for that year.
Miss it and you cannot retrospectively paper over it. Complying loans require:
- A written agreement signed before the deadline
- Interest at or above the benchmark interest rate — 8.77% for the 2026–27 income year (it was 8.37% for 2025–26)
- A maximum term of 7 years unsecured, or 25 years if secured by a registered mortgage over real property meeting the 110% value test
- Minimum yearly repayments made by 30 June each year
Pitfall 3: paying the minimum repayment out of a new loan
Borrowing from the company to make the repayment to the company achieves nothing. Where a payment is funded by a further loan from the same company, it does not count as a repayment. The repayment has to come from somewhere else — salary, a franked dividend, or personal funds.
Pitfall 4: forgetting the rate changes every year
The benchmark rate is set annually and it moves. It was 4.52% in 2022 and 8.77% in 2027. Minimum yearly repayments must be recalculated each year using that year’s rate. Running last year’s number puts you under-repaid, and an under-repayment is itself a deemed dividend.
Pitfall 5: unpaid present entitlements
Where a trust makes a company beneficiary presently entitled to income but does not actually pay it, the unpaid present entitlement can fall within Division 7A. This is a live and technical area and one where the ATO’s position has shifted over time. If your group has a corporate beneficiary, this needs looking at specifically rather than assumed to be fine.
Pitfall 6: assuming the distributable surplus saves you
A deemed dividend is capped at the company’s distributable surplus. People sometimes rely on this to conclude there is no problem. It is a genuine limit, but it is calculated at year end on a specific statutory formula, and a company with retained earnings usually has one. It is a backstop, not a plan.
What to do instead
- Review the loan account before 30 June, not after. Options exist during the year that do not exist afterwards.
- Pay yourself properly. Salary or a franked dividend is taxed, but it is taxed once and predictably.
- Put a complying agreement in place if a loan is genuinely needed, before lodgement day.
- Diarise the minimum repayment and recalculate it annually.
- Keep personal and company spending separate. Most Division 7A problems are bookkeeping problems that grew up.
Need a hand with this?
If you have a shareholder loan account you have not looked at, or a corporate beneficiary with unpaid entitlements, we can review the position and tell you what your options actually are. The earlier in the year that happens, the more of them there are.
Related reading
- Payday Super started 1 July 2026: what employers need to do now
- FBT traps that catch small employers
- Asset protection for small business owners: what works and what doesn’t
- Working from home deductions 2025–26: the 70 cent rate explained
- Our full range of services
Sources
- ATO – Division 7A benchmark interest rate
- ATO – Private company benefits: Division 7A dividends
- ATO – Division 7A myths debunked
This article is general information only and does not take your personal circumstances into account. Rates and thresholds are current at the date of publication. Speak to us before acting on anything you read here.
Samrat Sharma & Associates 