What Is Division 7A and Why Does It Matter?

Division 7A is a set of rules in the Income Tax Assessment Act 1936 designed to stop private company shareholders from accessing company profits tax-free through loans or other payments. Without Division 7A, a business owner could simply take a low-interest or interest-free loan from their company instead of paying themselves a salary or dividend — both of which attract personal income tax.

The ATO treats any unpaid loan amount as a deemed dividend if it does not meet strict compliance rules. That deemed dividend is included in the shareholder's assessable income and taxed at their marginal rate, just like a regular dividend. The company also loses the ability to treat the payment as a loan rather than a distribution of profits.

Division 7A applies to loans made on or after 4 December 1997. The rules cover payments, loans, and debt forgiveness by private companies to shareholders, directors, and their associates — including family members, trusts, and partnerships connected to a shareholder.

Division 7A Minimum Repayment Formula

The minimum yearly repayment for a Division 7A complying loan is calculated using an amortising loan formula. You repay the loan in equal annual instalments over the loan term, with each instalment including both principal and interest.

The formula is: Minimum Annual Repayment = Loan Balance × (r ÷ (1 − (1 + r)^−n)), where r is the ATO benchmark interest rate and n is the number of years.

Division 7A Benchmark Interest Rate History

The ATO publishes a benchmark interest rate each financial year. This rate applies to all new Division 7A complying loans made during that year. For existing loans, the rate in place when the loan was made remains locked in for the life of the loan, provided the loan agreement remains compliant.

Rates have risen significantly since 2022, following the RBA cash rate increases. A higher benchmark rate means larger minimum yearly repayments for new loans, which directly impacts cash flow planning for business owners.

Key Requirements for a Complying Division 7A Loan

To avoid a deemed dividend, your loan must satisfy all of the following conditions. The first and most important requirement is a written loan agreement — verbal arrangements do not satisfy Division 7A. The agreement must be in place before the loan repayment due date (usually the company's lodgement date for the income year).

The loan must have a maximum term of 7 years for unsecured loans, or 25 years for loans secured by a registered mortgage over real property. Each year you must make the minimum repayment calculated using the ATO benchmark rate by the end of the financial year.

The repayment must be made in full — partial payments are not counted unless they meet the entire minimum amount. If you miss a repayment or pay less than the minimum, the shortfall is treated as a deemed dividend in that year.

What Happens If You Breach Division 7A?

If a loan does not meet Division 7A requirements, the unpaid amount — or the shortfall in repayment — is treated as a deemed unfranked dividend paid by the company to the shareholder. This amount is added to the shareholder's assessable income and taxed at their marginal income tax rate.

For example, if you borrow $100,000 from your company without a complying agreement, that $100,000 is treated as dividend income. If you are in the 37% tax bracket, you would owe $37,000 in tax on that amount, plus the Medicare levy of 2% on top. The company cannot deduct the loan amount as an expense either.

The ATO can also impose penalties for failing to comply with Division 7A. However, if you discover a breach, you may be able to use the ATO's voluntary disclosure process to reduce penalties.

ATO Compliance Focus on Division 7A

The ATO continues to make Division 7A a compliance priority. They use data matching to identify loans between private companies and their shareholders, including loans recorded in financial statements but not covered by a written agreement. They also review unpaid present entitlements (UPEs) from trusts to companies, which can trigger Division 7A.

If you have an existing loan that is not compliant, you can enter into a complying loan agreement and start making repayments going forward. The ATO provides a structured approach to remediating past breaches, but you should act before the ATO contacts you.

Using a Division 7A calculator helps you stay on top of your minimum repayment obligations. It is also wise to review your take-home pay and overall compensation structure to ensure you are not inadvertently triggering Division 7A through informal arrangements.

Division 7A Loan Scenarios

Consider a director who borrows $150,000 from their company in July 2025. Under a standard 7-year loan at 9.08%, the minimum yearly repayment is approximately $29,847. If the director cannot make that payment, they risk a deemed dividend of the shortfall amount.

If the loan is secured by a registered mortgage over the director's home, the term extends to 25 years, reducing the minimum repayment to approximately $15,367 per year. This lower repayment can make compliance easier, but the director must actually register the mortgage — a mere agreement to grant security is not enough.

Business owners should also consider whether it makes more sense to pay themselves a salary that flows through to after-tax income rather than using loans. Salary sacrifices and salary sacrifice arrangements may offer a cleaner alternative.

Frequently Asked Questions

Does Division 7A apply to loans from trusts?

Division 7A applies specifically to loans from private companies. Loans from trusts are not directly covered by Division 7A, but unpaid present entitlements (UPEs) from a trust to a private company can trigger Division 7A if the company is a shareholder of another private company.

What is the Division 7A interest rate for 2025-26?

The ATO benchmark interest rate for Division 7A loans made in FY 2025-26 is 9.08%. This rate applies to all new complying loan agreements entered into during the 2025-26 income year.

Can I repay a Division 7A loan early?

Yes, you can repay a Division 7A loan early without penalty. Making additional repayments above the minimum is permitted and will reduce the outstanding balance faster, lowering future minimum repayments. However, once repaid, you cannot re-borrow the same amount without a new complying loan agreement.

What happens if I sell my company shares while a Division 7A loan is outstanding?

If you sell your shares or cease to be a shareholder, any outstanding Division 7A loan balance may become immediately repayable. The loan balance could also be treated as a deemed dividend if not repaid by the time you cease being a shareholder. It is important to settle all Division 7A loans before changing your ownership structure.

Do I need an accountant for Division 7A compliance?

Division 7A is complex and the penalties for non-compliance can be significant. Most business owners benefit from professional advice. An accountant can prepare the written loan agreement, calculate minimum yearly repayments, and ensure your superannuation and overall remuneration strategy stays compliant.