Guide · Updated 17 August 2026
Division 7A: taking money out of your own company
Why the money in your company isn't your money, what a complying loan actually requires, and how to fix a director loan account before year end.
What is Division 7A?
Division 7A treats payments, loans and forgiven debts from a private company to a shareholder or their associate as unfranked deemed dividends — taxable to you with no franking credit — unless the amount is repaid or put on a complying loan agreement before the company's lodgement day. A complying loan needs a written agreement, interest at least at the ATO benchmark rate, and minimum annual repayments over a maximum term of seven years (25 years if secured by real property). This is the most common expensive mistake in owner-managed companies.
- Applies to loans, payments and forgiven debts
- Fix by repayment or a complying loan agreement
- Written agreement, benchmark interest, 7-year term
- Deemed dividends are unfranked
How the problem arises
Almost never deliberately. The company pays a personal expense; the owner draws cash between wage runs; a family member's car is bought through the business; profits are "taken as needed" and coded to a loan account. By 30 June the director's loan account owes the company $80,000 and nobody made a decision about it.
Because the company's tax return reports that balance, Division 7A applies whether or not anyone intended a loan. And a deemed dividend is unfranked — you're taxed at your full marginal rate on money the company already paid 25% or 30% tax on.
The three ways out
1. Repay it before the company's lodgement day. Genuine repayment, not a journal entry — and not repayment followed immediately by a new loan of the same amount, which the ATO looks straight through.
2. Put it on a complying loan agreement. Written, dated, interest at or above the benchmark rate, principal and interest repayments each year, maximum seven-year term (or 25 years secured over real property). Each year's minimum repayment must then actually be made.
3. Declare a dividend or wages to clear the balance — taxable, but franked in the case of a dividend, and often the cleanest answer where the money is genuinely gone.
Staying out of trouble
- Set a regular wage or drawing amount and stick to it, rather than dipping as needed.
- Keep a separate business account and card, and never pay personal expenses from it.
- Review the loan account quarterly, not at year end.
- If a loan is needed, document it properly at the time — retrospective fixes are constrained by the lodgement-day deadline.
- Remember unpaid present entitlements: amounts a trust owes a corporate beneficiary can also fall within Division 7A.
We reconcile director loan accounts before year end for every company client, precisely because the fix is cheap in May and expensive in November.
Frequently asked questions
Can I just repay the loan and re-borrow?
No. Repayments made with the intention of re-borrowing a similar amount are disregarded. The ATO looks at substance, and the pattern is obvious in the accounts.
What is the benchmark interest rate?
The ATO publishes it annually, based on the standard variable housing loan rate. Your loan agreement must charge at least that rate for the year, and the interest is assessable income to the company.
Does Division 7A apply to trusts?
It can. Where a trust has an unpaid present entitlement to a corporate beneficiary and the funds are used by shareholders or associates, Division 7A consequences can follow. Family groups with trust-and-company structures need this reviewed annually.
What happens if a deemed dividend arises?
You include the amount in your assessable income as an unfranked dividend, taxed at your marginal rate with no credit for company tax paid. The ATO has a discretion to disregard the dividend in limited circumstances — but relying on discretion is a poor plan.
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