Chartered Accountant Timothy Quinn leads Tax & Accounting at Lawpath. 16+ years in tax advisory, specialising in startup growth and expansion. Passionate about supporting entrepreneurial clients with early-stage investment incentives, restructuring, international exit strategy planning, and more.
Navigating the complexities of tax law is an ongoing challenge for every Australian small business owner. This is especially true when it comes to accessing company funds for personal or family use.
Division 7A provisions are one of the more confusing and risky legalities if you are operating through a private company. What might seem like a simple shareholder loan or family payment can result in unexpected tax bills and harsh penalties.
Are you unsure what constitutes a tax-compliant withdrawal or whether your company “loan” arrangement might be scrutinised? You’re not alone.
In this guide, we will walk you through the Division 7A provisions, outline what triggers them, and give you practical steps to keep your business compliant and protect your hard-earned profits.
Table of Contents
What is Division 7A, and why does it matter?
Division 7A is an anti-avoidance provision within the Income Tax Assessment Act 1936 (ITAA 1936) designed to stop private companies from giving profits to their owners in ways that avoid tax. Instead of paying dividends (which are taxed properly), some businesses might try to take money out through loans, payments, or debt write-offs. Division 7A closes this loophole.
Why does this matter?
Many family companies and closely held businesses use so-called “bucket” companies to hold profits. It can be tempting for directors or shareholders to dip into these funds for personal use, but if they do it outside the Division 7A rules, the ATO can step in.
In that case, the withdrawal is treated as if it were a dividend — but without any franking credits to reduce the tax. This usually means paying tax at the person’s full marginal rate, which can be much higher.
The ATO frequently audits and penalises non-compliant arrangements. This means it’s essential to follow the rules and ensure compliance. Otherwise, you might face hefty penalties.
How does Division 7A define a “loan” and what triggers it?
Division 7A uses a very broad definition of a “loan”. It includes not just traditional cash advances, but also:
- Any provision of credit, financial accommodation, or a payment on behalf of a shareholder or associate
- Unpaid Present Entitlements (UPEs) from trusts to company beneficiaries
- Any arrangement, direct or indirect, that enables a shareholder to access company funds or financial benefit, even via interposed entities like trusts or related companies.
The rules cover scenarios where a company might lend funds to a trust, which then benefits the shareholders. If a trust owes a company a distribution that hasn’t been paid, known as a UPE, this could also be considered a loan.
The ATO often scrutinises these arrangements, especially where there’s evidence that the funds ultimately end up with shareholders or family members. It doesn’t matter how many entities are involved in the process.
Examples of amounts caught as loans
Let’s take a look at some common situations that may trigger Division 7A.
- Direct cash loan: A company pays $50,000 to a shareholder for their personal expenses, and there’s no formal loan agreement.
- Payment for non-business purposes: A director uses a company credit to pay for a family holiday, then repays it later.
- Trust distributions (UPEs): A trading trust makes the company a beneficiary, but the money never actually changes hands (“bucket company” strategy).
- Interposed entities: Company loans money to a family trust, which then lends it to a shareholder, allowing access to tax-free cash.
If any of these arrangements don’t comply with Division 7A, the ATO may treat the amount as an unfranked dividend in the hands of the shareholder.
What makes a loan compliant, and when does it avoid being a dividend?
To avoid Division 7A from applying and treating the amount as a dividend, any loan to a shareholder or associate must meet the following strict criteria.
- Written loan agreement: It must be executed on commercial terms before the company’s tax return lodgement day for the year in which the loan is made.
- Benchmark interest rate: The loan must charge at least the ATO’s designated rate for the year.
- Maximum loan term: The maximum term for an unsecured loan is seven years. A secured loan is up to 25 years, but only if it is secured against real property valued at least 110% of the loan.
- Minimum annual repayments: Principal and interest must be repaid under the terms set out in the agreement, calculated according to the ATO’s formula.
Provided all these requirements are met, the ATO treats the funds accessed as a genuine loan and not as a dividend. This keeps both the shareholder and company compliant for tax purposes.
Important details in a complying loan agreement
A Division 7A written loan agreement should include:
- Full names and addresses of borrower and lender
- Principal amount borrowed
- Commencement date and full term of the loan (7 to 25 years)
- Repayment schedule and frequency (often annual)
- Stipulated interest rate (at least the benchmark rate)
- Details of security, if applicable
- Signatures dated before the tax return’s lodgement day
Minimum yearly repayments — and what happens if you miss them
Minimum yearly repayments incorporate principal plus interest (using the annual benchmark rate). The ATO formula determines the exact figure. If you miss a repayment or pay less than the minimum, the shortfall will be treated as an unfranked dividend. Again, you’d pay taxes on the amount at your highest marginal tax rate, without franking credits.
If a shareholder has multiple Division 7A loans, the minimum repayments can be amalgamated. That said, missing repayments or having back-to-back loans (where repayments are immediately re-borrowed) raises red flags for the ATO.
The tax office now formally disregards repayments funded by new loans under anti-avoidance rules (section 109R) and expects all repayments to be genuine and retained in the company.
For accurate annual planning, you can use the official Division 7A loan calculator on the ATO website.
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Common myths and mistakes that trip business owners up
Despite widespread awareness of Division 7A, several myths and misconceptions persist.
“Company money is the owner’s money”
It’s not. Using company funds for personal use without a proper loan agreement or dividend declaration will trigger Division 7A.
“Short-term withdrawals repaid before lodgement always avoid Division 7A”
This is only true if the loan is fully repaid before the lodgement day of the company’s tax return. Many owners miss this deadline, leading to unintended dividend treatment.
“Interposed entities allow me to sidestep the rules”
Division 7A rules cover circular loans, payments routed via trusts, or other related entities. The ATO looks at substance over form and will catch arrangements attempted through multiple “round robin” entities.
“Commissioner’s discretion is a guaranteed escape route”
ATO discretion for Division 7A is rare. Relief is only available for honest mistakes or inadvertent omissions, and the circumstances must be substantiated. Simply not knowing the rules doesn’t qualify.
In summary, common compliance failures include:
- Not formalising loan agreements before the tax return due date
- Repaying loans with funds immediately re-borrowed
- Failing to document repayments or using the wrong interest rate
- Not reviewing arrangements annually before 30 June.
Anti-avoidance provisions now explicitly cover refinancing or round-robin repayments, so it’s essential to review every repayment and linked loan between entities carefully.
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Recent developments, ATO guidance, and discretion
Recent legislative and ATO guidance changes have focused on benchmark interest rates, interpretations of Section 109R, UPE treatment, and notable case law such as Bendel.
- The benchmark interest rate for 2025–26 is now 8.37%, down from 8.77% in the prior year.
- The landmark Bendel case clarified that, as of early 2025, a UPE from a trust to a company is not regarded as a loan under Division 7A, subject to ongoing appeal or legislative changes.
- Draft ATO guidance now formalises the view that repayments funded by new, indirect loans (even through unrelated third parties) will be disregarded, and the original loan treated as unpaid.
The Commissioner’s Discretion (Section 109RB)
The Commissioner may exercise discretion to disregard a deemed dividend under Division 7A or allow it to be franked if there’s evidence of an honest mistake or inadvertent omission. Relief is rare and depends on:
- Circumstances leading to the error or omission
- Actions taken to correct the situation, and how quickly
- Past compliance history
- Any other matters considered relevant
Common scenarios where relief is refused include ignorance of the law, repeated or systemic non-compliance, or deliberate attempts to mask distributions.
Arrangements under scrutiny include:
- Trust distributions where UPEs are not paid on time or properly documented
- Failure to place funds in a sub-trust for the company
- Failing to repay loans or sub-trust investments at the end of the agreement term
Practical tips to stay compliant and reduce risks
Division 7A compliance isn’t just about dodging penalties; it preserves shareholder relations, ensures healthy cash flow, and protects your business’s reputation. Here’s how to mitigate Division 7A risks.
- Keep formal written agreements for every loan, signed before the tax return’s lodgement day.
- Track repayment schedules carefully, ensuring full annual repayments before 30 June.
- Review arrangements annually; new benchmark rates apply every financial year, so update your agreements.
- Work with a qualified tax adviser to keep up with legislative changes, ATO rulings, and planning ahead.
- Use the official ATO Division 7A calculator to estimate minimum yearly repayments and catch shortfalls.
- Avoid informal or circular arrangements, especially those involving related entities or trusts.
- Document every transfer, repayment, and loan agreement meticulously.
Being proactive doesn’t just help you prevent tax shocks. It keeps your business compliant and sustainable.
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FAQ
What is the current Division 7A benchmark interest rate?
For the 2025–26 income year, the Division 7A benchmark interest rate is 8.37%. This rate sets the minimum interest to be charged on compliant company loans to avoid a deemed dividend.
Do unpaid present entitlements always trigger Division 7A?
No, following the Bendel appeal decision in early 2025, the Full Federal Court confirmed that a UPE from a trust to a company is not always treated as a loan for Division 7A purposes. Taxpayers should still seek advice, as ongoing appeals or legislative updates may alter the current position.
Ensuring compliance without a hefty tax bill
The Division 7A provisions in Australia are a critical piece of legislation that protects taxpayers and keeps companies accountable. However, making an honest mistake is easy — after all, taxation rules are confusing.
Protect your business by following the guidelines above, seeking professional advice, and documenting everything in detail.
If you’re still unsure about your business tax compliance or want to access expert support to ensure your structure is bulletproof, reach out to Lawpath. We provide simple, affordable legal and tax advice tailored for Australian SMEs.
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