Division 7A Loans: What Every Australian Company Director Must Know Before 30 June 2026
If you’re a director or shareholder of a private company in Australia, there’s a good chance you’ve borrowed money from your company at some point — perhaps to cover a personal expense, fund a property purchase, or simply smooth out cash flow. It feels straightforward enough. But under Division 7A of the Income Tax Assessment Act 1936, what seems like a simple loan can quickly become a very expensive tax problem.
With 30 June 2026 just weeks away, now is the time to review any loans, payments, or unpaid entitlements between you and your private company — before the ATO does it for you.
What Is Division 7A and Why Does It Exist?
Division 7A is an integrity measure in Australian tax law designed to prevent private company owners from accessing company profits tax-free. Without it, a director could simply “borrow” money from their company indefinitely, avoiding the tax they’d otherwise pay on a salary or dividend.
Under Division 7A, if a private company makes a loan, payment, or debt forgiveness to a shareholder or their associate — and it’s not properly structured — the ATO treats it as an unfranked deemed dividend. That amount is added to the shareholder’s personal assessable income and taxed at their marginal rate (up to 47% including the Medicare levy), with no franking credits to offset the bill.
The rules apply to private companies, and an “associate” is defined broadly — it includes relatives, partners, and entities controlled by the shareholder.
What Triggers a Division 7A Deemed Dividend?
Loans to Shareholders or Associates
The most common trigger is a loan from a private company to a shareholder or their associate. The ATO defines “loan” broadly — it includes any advance of money, provision of credit, or other financial accommodation.
If the loan is not fully repaid before the company’s lodgment day (the earlier of the due date for the company’s tax return or the date it’s actually lodged), it will be treated as a deemed dividend — unless it’s structured as a complying loan agreement.
Payments and Use of Company Assets
Direct payments made by the company for a shareholder’s private benefit — covering personal expenses, transferring property, or allowing private use of company assets like a car or boat — can also trigger Division 7A, unless they fall under specific exclusions (such as minor benefits under $300 for FBT purposes).
Debt Forgiveness
If your company forgives a debt you owe it, the forgiven amount is generally treated as a deemed dividend. This includes situations where a debt becomes legally unenforceable — for example, after six years under the statute of limitations.
Unpaid Present Entitlements (UPEs) and Interposed Entities
Division 7A also captures more complex arrangements. If a trust makes a private company a beneficiary but doesn’t physically pay the funds — and those funds are then used by the shareholder — the ATO may treat this as a Division 7A loan. Similarly, benefits passed through intermediary entities to reach a shareholder can be caught by the interposed entity rules.
The 2025–26 Benchmark Interest Rate: 8.37%
To avoid a loan being treated as a deemed dividend, it must be structured as a complying Division 7A loan. This requires:
- A formal written loan agreement signed before the company’s lodgment day
- A maximum loan term of 7 years (unsecured) or 25 years (secured by a registered mortgage over real property)
- Interest charged at at least the ATO benchmark interest rate for each income year
- Minimum yearly repayments (MYR) made by 30 June each year
For the income year ending 30 June 2026, the Division 7A benchmark interest rate is 8.37% (up from 8.27% in 2023–24, and down slightly from 8.77% in 2024–25). This rate is set by the ATO based on the Reserve Bank of Australia’s variable housing loan indicator rate and applies to all complying Division 7A loans for the year.
The minimum yearly repayment covers both principal and interest, and must be recalculated each year as the benchmark rate changes. The ATO provides a Division 7A calculator to help you work out the correct MYR.
What Happens If You Get Division 7A Wrong?
The consequences of a Division 7A breach are severe:
- Unfranked deemed dividend: The full loan or payment amount is included in your assessable income and taxed at your marginal rate — potentially 47 cents in the dollar — with no franking credits.
- ATO penalties and interest: If the ATO identifies a breach on audit, it can impose penalties and general interest charges on the tax shortfall.
- Reputational and governance risk: Non-compliance signals poor corporate governance and can trigger broader ATO scrutiny of your business affairs.
While the ATO does have discretion to disregard a deemed dividend in cases of genuine honest mistake, this is not something to rely on — and it requires demonstrating that you took proactive steps to fix the error.
Key EOFY Actions Before 30 June 2026
With the end of the financial year approaching, here’s what you should do now:
1. Review All Loans from Your Company
Identify any amounts you or your associates have borrowed from your private company during 2025–26. Check whether a complying loan agreement is in place for each one.
2. Make Your Minimum Yearly Repayment
If you have an existing Division 7A loan, your minimum yearly repayment for 2025–26 must be made by 30 June 2026. Use the ATO’s Division 7A calculator to confirm the correct amount, factoring in the 8.37% benchmark rate.
3. Formalise Any New Loans Before Lodgment Day
If your company made a new loan to you or an associate during 2025–26 that hasn’t been formalised, you must put a complying written loan agreement in place before the company’s lodgment day to avoid a deemed dividend.
4. Check for Unpaid Present Entitlements
If your company is a beneficiary of a family trust, review whether any unpaid present entitlements exist and whether they need to be placed on complying loan terms.
5. Review Debt Forgiveness Arrangements
If your company has forgiven any debts owed by shareholders or associates during the year, seek advice on whether Division 7A applies.
Sources
- Australian Taxation Office — Division 7A: Loans, payments and forgiven debts
- Australian Taxation Office — Division 7A benchmark interest rate
- Australian Taxation Office — Division 7A calculator and decision tool
- Australian Taxation Office — Complying loans
- Australian Taxation Office — Unpaid present entitlements
Get Expert Advice Before 30 June
Division 7A is one of the most technically complex areas of Australian tax law — and the stakes are high. A single missed repayment or an improperly documented loan can result in a large, unexpected tax bill at your marginal rate.
TaxServe Australia’s experienced tax advisers can help you:
- Review existing Division 7A loans and ensure compliance
- Calculate your minimum yearly repayments for 2025–26
- Draft complying loan agreements before the lodgment day deadline
- Identify and resolve any unpaid present entitlements or interposed entity issues
Don’t leave it to chance. Contact TaxServe Australia today for a confidential consultation and make sure your company’s affairs are in order before 30 June 2026.