What Is A Division 7a Loan?

Division 7A of the Income Tax Assessment Act 1936 is one of those tax rules that can quietly create big problems if overlooked — especially for private companies. At its core, Division 7A is about preventing companies from making tax-free profit distributions to shareholders or their associates in disguise — whether that's through direct payments, interest-free loans, use of company assets or forgiving a debt.

It's particularly important now. The Division 7A benchmark interest rate jumped to 8.27% for the 2024–25 income year, putting pressure on repayment amounts and making compliance harder to ignore. If you're a director, shareholder or financial controller of a private Australian company, understanding these rules is part of keeping your business compliant and your tax bill predictable.

This article breaks down Division 7A loans: what they are, how they work and what you need to do to stay on the right side of the ATO. We'll also explore practical strategies to manage Division 7A compliance and reduce risk.

Explore our business solutions if you need tailored support.

Understanding Division 7A loans

So, what does Division 7A actually regulate? In short, it applies when private companies provide value to shareholders (or their associates) outside of regular dividends or salary. This value could come in the form of:

• Loans (with or without interest)
• Payments
• Use of a company asset (like a vehicle or property)
• Forgiveness of a debt
• Any financial accommodation, including indirect benefits

If these aren't structured properly — under what's known as a complying loan agreement — the ATO may reclassify them as unfranked dividends, which are taxed at the recipient's marginal tax rate (up to 47%).

Division 7A is not about banning loans altogether. It's about ensuring they are formalised, reported and taxed appropriately. That's what makes a Division 7A loan different. It is essentially a regulated transaction that must follow specific terms, or it becomes assessable income.

The purpose and scope of Division 7A

Division 7A was introduced as an anti-avoidance provision. Its purpose is to preserve the integrity of Australia's tax system by closing the gap between company profits and shareholder benefits, especially in private structures where it's easier to blur those lines.

It applies only to private companies, not public ones, and it captures a wide range of scenarios, such as:

• A director borrowing funds to pay for personal expenses
• A shareholder using company property for free
• A trust distributing income to a company (called a bucket company) and then having the company's cash distributed back to the individual

Even unpaid present entitlements (UPEs) from trusts to companies can trigger Division 7A issues, especially under Subdivision EA rules.

See our taxation services to understand how Division 7A interacts with other company structures.

Busting 5 common Division 7A myths

1. Only cash loans are affected.
Not true. Division 7A applies to any form of financial benefit — including the use of a company-owned boat or paying off someone's personal mortgage.

2. I can just forgive the loan.
Forgiveness usually triggers a deemed dividend, which can be worse than repaying it.

3. My trust doesn't need to worry.
Actually, if your trust has a UPE to a company and the funds are used by an individual, it may still be caught under Division 7A.

4. Repaying the loan later is fine.
Only if it's done by the lodgement date of the company's tax return. After that, the benefit is already assessable.

5. Historic UPEs aren't a problem.
The ATO's recent focus and cases like Bendel v Federal Commissioner of Taxation are changing how even older arrangements are treated.

Need help untangling these misconceptions? Our business advisors are here to assist.

Managing Division 7A loan requirements and risks

Division 7A loans can be useful, but only if they're set up correctly. In this section, we cover what makes a loan compliant and what happens if it's not.

What makes a loan 'comply'?

To avoid problems, a Division 7A loan agreement must:

• Be in writing before the company's tax return due date
• Charge interest at least equal to the Division 7A benchmark interest rate (8.27% in 2024–25)
• Have a term of:
  • 7 years if unsecured (a standard loan)
  • 25 years for a secured loan over real property

The agreement must specify the loan amount, repayment schedule and interest terms. Without this, the ATO may reclassify it as a Division 7A dividend.

Minimum yearly repayments

Every year, you must make a minimum yearly repayment on a 7A loan. The ATO publishes a formula and provides a Division 7A calculator to work this out.

Example:
If the loan balance is $100,000 and the interest rate is 8.27%, your minimum repayment (principal + interest) for the first year will be approximately $18,178.

Failure to make this payment means the unpaid amount becomes an unfranked deemed dividend.

Consequences of non-compliance

If Division 7A applies and the loan isn't compliant:

• The amount is treated as an unfranked dividend
• It becomes assessable income
• It's taxed at the shareholder's full marginal rate
• It can't be franked
• It increases Division 7A risks for future audits

In a worst-case scenario, especially during insolvency, the Division 7A loan may be recoverable by a liquidator, possibly resulting in bankruptcy.

Can loans be amended or refinanced?

Yes. You can:

• Convert unpaid benefits into a complying loan before the lodgement deadline
• Refinance an existing loan by rolling it into a new secured or unsecured agreement (including an amalgamated loan, which consolidates multiple 7A loans)

Just remember: the new agreement must still meet all compliance requirements.

ATO discretion for mistakes

Under Section 109RB, the ATO has discretion to disregard a deemed dividend if:

• There was an honest mistake
• There are extenuating circumstances
• You apply in writing and provide a plan for corrective action

See our payroll tax and advisory services to keep your company obligations aligned.

Tax planning strategies with Division 7A

Strategic use of bucket companies is one of the most common ways to reduce Division 7A exposure. By allocating trust income to a corporate beneficiary (taxed at 25–30%), you can minimise immediate tax. But the funds must stay in the company or be structured as a complying loan to avoid issues.

Other strategies:

• Use dividends to repay loans during low-income years, when marginal rates are lower
• Make sure funds are used for income-producing purposes (so interest may be deductible)
• Avoid using company assets for personal benefit unless correctly accounted for
• Keep an eye on distributable surplus, as this limits the amount that can be treated as a Division 7A dividend

Planning ahead can help reduce reliance on non-compliant loans altogether. See our full services overview for more.

FAQs

What is a Division 7A loan?
It's a loan, payment or benefit from a private company to a shareholder or associate that may be taxed as an unfranked dividend unless it meets specific compliance rules.

What is the current Div 7A interest rate?
The benchmark rate is 8.27% for the 2024–25 income year, published by the Australian Taxation Office.

Can a Div 7A loan be forgiven?
Yes, but forgiveness typically results in a deemed dividend — it's rarely beneficial.

What is the minimum repayment for a Div 7A loan?
It depends on the loan amount, term and benchmark interest rate. The ATO provides a calculator. A chartered accountant can also prepare an exact schedule for you.

Get help with Division 7A compliance

Division 7A compliance is not something to leave to chance. From creating compliant loan agreements to tracking annual repayments and avoiding Division 7A issues, a clear plan and the right support can save you from major tax trouble down the line.

Learn how Wilson Porter can help your business navigate Division 7A compliance and optimise your tax strategy.