Division 7A Loans - What Company Directors Need to Check Before 30 June
If your private company has ever lent money to you personally — or to a family member, a related trust, or another entity you control — there's a good chance Division 7A applies to you. With 30 June approaching fast, now is exactly the right time to check you haven't accidentally set yourself up for a significant tax bill.
What is Division 7A?
Division 7A is a section of the tax law designed to prevent shareholders and their associates from accessing company profits as tax-free loans. If you borrow money from your own private company without treating it correctly, the ATO can deem that loan to be an unfranked dividend — meaning it gets added to your personal taxable income, with no franking credits to offset the tax you'll owe. It doesn't matter that you never intended it as income. If the paperwork isn't right, that's exactly how it's treated.
What makes a loan compliant?
For a loan from a company to a shareholder or associate to avoid being treated as a dividend, it must be documented in a written agreement that meets specific requirements. The loan must carry a minimum interest rate set by the ATO each year (for 2025–26 the benchmark interest rate is 8.77%), and it must be repaid within a maximum term — generally seven years for an unsecured loan, or up to 25 years if the loan is secured by a registered mortgage over real property. The written agreement must be in place by the time the company lodges its tax return for the year in which the loan was made. Division 7A also casts a wide net: it applies not just to formal loans, but to payments made on your behalf by the company and to debts the company forgives. If your company paid a personal expense that was never repaid, Division 7A could apply.
What you need to do before 30 June
If you have an existing Division 7A loan, you need to check that your minimum yearly repayment has been made before 30 June. Missing a minimum repayment means the shortfall is treated as a dividend — even if the underlying loan agreement is otherwise compliant. If a new loan was made during the year and doesn't yet have a written agreement, the safest approach is to get documentation sorted well before 30 June rather than waiting for lodgment. If the loan balance is large and repayments will create cash flow problems, there are legitimate options — such as paying a franked dividend to offset part of the balance — but these need careful planning.
The cost of doing nothing
The consequences of getting Division 7A wrong can be significant. A deemed dividend adds directly to your assessable income in the year it arises, potentially pushing you into a higher tax bracket. There's no franking credit to offset it, and there may be penalties and interest on top if the ATO identifies the problem during a review. Division 7A is an area the ATO monitors closely, and with 30 June close, now is the time to act rather than hope for the best.
If you have a loan from your company — or you're not sure whether one might exist — please get in touch with us before 30 June. We can review your arrangements, make sure required repayments are on track, and put the right documentation in place so you're not facing an unexpected tax bill.