- Division 7A stops you taking money out of your private company tax-free as a loan. Get it wrong and the ATO taxes it as an unfranked deemed dividend at your marginal rate, no franking credits.
- To comply: a written loan agreement before the company lodges its tax return, interest at the benchmark rate, and minimum repayments by 30 June. Terms run 7 years unsecured or 25 years secured.
- The benchmark rate is 8.77% for 2026-27 (up from 8.37% in 2025-26), and applies to repayments from 1 July 2026.
Division 7A is the part of Australia’s tax law that stops owners of private companies pulling profits out tax-free by calling them a loan. It applies whenever a company lends money to a shareholder or director (or their associates), and if the loan does not meet strict conditions, the ATO recharacterises it as a deemed dividend and taxes it in your hands.
It affects almost every owner of a Pty Ltd who has drawn money from the company without taking it as salary or a franked dividend. The fix is straightforward but unforgiving on detail: a complying loan agreement, the right interest rate, and repayments on time.
What is Division 7A, and does it apply to you?
Division 7A of the Income Tax Assessment Act 1936 applies to private companies that give benefits to shareholders or their associates. It catches three things: loans, payments, and forgiven debts. It does not touch genuine salary, director’s fees, or franked dividends, since those are already taxed normally.
It applies to you if you are a shareholder or director who has taken value out other than through payroll or a declared dividend, including the owner-operator who draws on the company account and squares it up at tax time.
What counts as a Division 7A loan
More than a formal bank loan. It captures any advance of money or other financial accommodation. The three that trip owners up:
- Loans: money advanced to you or an associate, including informal running balances on a shareholder loan account.
- Payments: the company paying a personal expense for you.
- Forgiven debts: the company writing off what you owe it.
Unpaid present entitlements from a trust to a corporate beneficiary are no longer treated as Division 7A loans, following the High Court’s June 2026 decision in Commissioner of Taxation v Bendel. However, later dealings with those funds can still be caught under Subdivision EA, and section 100A may apply to reimbursement agreements. Get advice if you run a trust-and-company structure.
What happens if a loan doesn’t comply?
The ATO treats the whole loan as an unfranked deemed dividend in the year it was made. No franking credits, so you are taxed on the full amount at your marginal rate with nothing to offset it.
Example: a company lends a shareholder A$200,000 in 2025-26 with no agreement before lodgment day. The full A$200,000 is an unfranked dividend. At 45% plus 2% Medicare, that is about A$94,000 in tax, almost half the loan. With a complying agreement, the shareholder instead makes minimum repayments of around A$39,000 on a 7-year unsecured loan.
A mishandled loan does not just attract a penalty. It turns borrowed money into taxable income.
What makes a loan agreement comply?
Four things:
Requirement | What it means |
|---|---|
Written agreement | In place before the company’s lodgment day for the loan year |
Interest rate | At least the Division 7A benchmark rate, set yearly |
Maximum term | 7 years unsecured, or 25 years secured by real property (loan ≤110% of value) |
Minimum yearly repayment | By 30 June each year |
Lodgment day is the most common failure point. An agreement signed afterwards does not count, and a verbal one never qualifies.
Drafting tip: reference the benchmark rate by formula, not a fixed percentage, so it updates automatically each year.
What is the Division 7A benchmark interest rate?
8.77% for 2026-27 (year ending 30 June 2027), up from 8.37% in 2025-26. Once set, the rate does not change mid-year.
|
Income year |
Div 7A benchmark rate |
|---|---|
|
2026-27 (current, from 1 Jul 2026) |
8.77% |
|
2025-26 |
8.37% |
|
2024-25 |
8.77% |
The ATO sets the rate from the RBA standard variable owner-occupier housing rate published just before the year starts. Once set, it does not change even if the RBA later revises its figure. The rate drives your minimum yearly repayment, so recalculate when the year rolls over.
How to keep director loans compliant
Staying on the right side of Division 7A is a matter of habit and timing rather than complexity. The practical steps:
- Document before lodgment day. Put a written complying loan agreement in place before the company lodges its tax return for the year the loan was made. This is the deadline most people miss.
- Charge at least the benchmark rate. Set interest at or above the benchmark for each year, ideally by referencing it as a formula so it updates automatically.
- Make the minimum yearly repayment by 30 June. Diarise it. A missed repayment turns the shortfall into a deemed dividend.
- Keep personal and company money separate. Treat the company account as the company’s. If you need funds, decide upfront whether it is salary, a dividend, or a documented loan.
- Get a review of real arrangements. Division 7A is fact-specific, and trust structures and prior-year loans add complexity. Have an accountant review actual loan balances before lodgment.
How Sleek helps you stay on the right side of Div 7A
Most Division 7A problems are not aggressive planning. They are an owner who drew on the account and never documented it. Sleek tracks your shareholder loan account, flags drawings early, sets up complying agreements, and calculates repayments at the correct benchmark rate. Plans start from A$1,800 a year.
This article is general information, not tax advice. Division 7A outcomes depend on your specific facts, so have your actual arrangements reviewed.
Prices may vary with current promotions, check the latest on the relevant page.
450,000
businesses worldwide.
from 4,100+ reviews.
FAQs on Division 7A and director loans in Australia
What is Division 7A in simple terms?
Division 7A is a tax rule that stops owners of private companies taking profits out tax-free by disguising them as loans, payments or forgiven debts. If a company lends money to a shareholder or director and the loan does not meet strict conditions, the ATO treats the amount as a deemed dividend taxed at the borrower’s marginal rate.
What is the Division 7A benchmark interest rate for 2026-27?
The Division 7A benchmark interest rate is 8.77% for the 2026-27 income year, which starts 1 July 2026 and ends 30 June 2027. It is up from 8.37% in 2025-26. The ATO sets the rate each year from the Reserve Bank’s standard variable owner-occupier home loan rate published just before the year begins.
What happens if my director loan does not comply with Division 7A?
The ATO treats the loan as an unfranked deemed dividend in the year it was made. Because it is unfranked, you get no franking credits, so the full amount is taxed at your marginal rate. On a A$200,000 loan at the top rate, that is roughly A$94,000 in tax, compared with making minimum repayments under a complying agreement.
What is the difference between a 7-year and 25-year Division 7A loan?
An unsecured Division 7A loan can run for a maximum of 7 years. A loan can run up to 25 years only if it is secured by a registered mortgage over real property and the loan does not exceed 110% of that property’s value. Both require a written agreement, benchmark interest, and minimum yearly repayments by 30 June.
When does a Division 7A loan agreement need to be in place?
Before the company lodges its tax return for the income year in which the loan was made, known as lodgment day. An agreement signed after that date does not comply, and a verbal agreement never qualifies regardless of how clear it is. This timing is the most common reason loans fail the Division 7A test.
View more
Does Division 7A apply to a sole director who owns the whole company?
Yes. Division 7A applies to loans from a private company to its shareholders or directors and their associates, including the sole director and shareholder of a one-person Pty Ltd. The company’s money is legally separate from yours even when you own all the shares, so drawing on it without documentation can trigger a deemed dividend.
