One question underneath the intimidating name: was tax genuinely paid on this profit?
It has an intimidating name. It's referenced constantly in accounting conversations. And most business owners have never had it actually explained in plain English.
Division 7A, at its core, exists to answer one question: has a company owner genuinely taken profit out and paid tax on it — or found a way around that?
The short answer
Division 7A is a set of tax rules stopping private companies from giving shareholders or their associates tax-free access to company profits, disguised as a loan, a payment, or a forgiven debt rather than a properly declared, taxed dividend. If a company lends you money and the arrangement doesn't meet specific conditions, the ATO can treat the entire amount as an unfranked dividend — taxed at your personal marginal rate, with no franking credits to soften it.
Why the rule exists
Without it, a company owner could simply “borrow” company profits indefinitely, never formally paying themselves a salary or dividend, and never paying personal tax on money they were genuinely using as their own. Division 7A closes that gap by treating a non-compliant loan as if it were a dividend — restoring the tax outcome the system intended, even though no dividend was formally declared.
What can trigger it
A company loan to a shareholder or their associate that isn't properly documented.
A company payment made on behalf of, or for the benefit of, a shareholder or associate.
A company forgiving a debt owed to it by a shareholder or associate.
An informal, undocumented pattern of withdrawals — exactly the kind of unmanaged director's loan account balance covered in its own guide.
How to avoid the deemed dividend outcome
There are two main ways to keep a genuine company-to-shareholder loan compliant:
Repay the full amount before the company's tax return lodgment day for the year the loan was made.
Put the loan on a complying Division 7A loan agreement before that same lodgment day — in writing, charging at least the ATO's benchmark interest rate (8.77% for the 2026–27 income year, up from 8.37% for 2025–26), with a maximum term of 7 years for an unsecured loan or 25 years if properly secured against real property, and make the required minimum yearly repayment by 30 June each year.
Missing either the documentation deadline or a required minimum repayment can trigger the deemed dividend outcome — timing here is genuinely strict, not a general guideline.
A simple example
| Scenario | Outcome |
|---|---|
| No written agreement, loan not repaid by lodgment day | The full loan amount is treated as an unfranked dividend, taxed at the shareholder's marginal rate with no franking credits |
| Complying loan agreement in place, benchmark interest charged, minimum repayments made | The loan remains a genuine loan for tax purposes — no deemed dividend |
| Complying loan agreement in place, but a minimum yearly repayment is missed | The shortfall for that year can itself be treated as a deemed dividend |
The genuine cost of getting this wrong
As an illustration only — not a universal outcome, since the actual result always depends on the taxpayer's specific circumstances and the detailed Division 7A rules — a $200,000 loan treated as an unfranked deemed dividend, taxed at the top marginal rate plus Medicare levy, could generate a tax bill approaching $94,000 in a single year, with no franking credits to offset it. The same loan, properly documented under a complying agreement at the current benchmark rate, would instead require ongoing minimum yearly repayments calculated on that rate over its term. The difference between these two outcomes is largely about paperwork and timing, not the underlying transaction — but the precise numbers depend on the individual's marginal tax rate and other circumstances.
Why this is worth addressing proactively, not reactively
The most common failure point isn't a badly structured loan — it's simply the absence of any documentation at all, discovered only when the accountant prepares the year-end tax return, by which point the deadline to put a complying agreement in place has often already passed. Addressing a growing director's loan balance during the year, rather than at tax time, is what actually protects the outcome.
A quick self-check
Do I have any money owing to me personally from my company, or vice versa, that hasn't been formally documented?
If there's a loan, is it either fully repaid or on a complying written agreement before my next tax return is lodged?
Am I aware of the current benchmark interest rate, and is it being applied correctly?
Have minimum yearly repayments on any existing complying loan actually been made by 30 June?
When should you get professional help?
you have a director's loan balance and aren't sure whether it's currently compliant;
you need a complying Division 7A loan agreement put in place before your next lodgment deadline;
you've missed a minimum yearly repayment and want to understand the consequences and options; or
you're planning a transaction between yourself and your company and want to structure it correctly from the outset.
Continue learning
→ What Is a Director's Loan Account — and Why Can It Become a Problem?
→ Company Money vs My Money — Why Does the Difference Matter?
→ How Do I Pay Myself From My Business?
SKC Accounting | Knowledge Centre | Knowledge Guide 076
Last reviewed: August 2026
General information only. This guide does not take into account your individual circumstances and is not a substitute for professional accounting, taxation, legal or financial advice.