Division 7A Basics for Company Owners

It is one of the most common conversations we have with company owners: the business account has money in it, you own the company, so you transfer some out when you need it. The problem is that a company is a separate taxpayer, and Division 7A says money taken out the wrong way can be taxed in your hands as a deemed dividend — usually with no franking credits, and no extra cash to pay the tax bill.

How Division 7A works

Division 7A applies when a private company provides money or benefits to a shareholder or their associate other than as salary, a properly declared dividend, or another arrangement the rules accept. It catches three main things: payments, loans, and forgiven debts. Unless an exception applies, the amount is treated as a deemed dividend and assessed as income in the recipient's hands.

The main escape route for loans is a complying loan agreement. The loan must be documented in writing before the company's lodgment day for that year, charge at least the Division 7A benchmark interest rate the ATO sets annually, and run no longer than 7 years if unsecured, or 25 years if secured by a registered mortgage over real property. From there, minimum yearly repayments of principal and interest must actually be made each year.

What we commonly see go wrong

• Drawings all year with a plan to "sort it out later" — and no loan agreement in place by lodgment day.
• Private expenses paid through the company and left sitting in a loan account that grows every year.
• Repaying the loan just before year end and redrawing it shortly after — specific anti-avoidance rules can treat that repayment as if it never happened.
• Missing a minimum yearly repayment, which can trigger a deemed dividend for the shortfall.
• A trust leaving an entitlement to a corporate beneficiary unpaid — Division 7A can reach these arrangements too, and this area has seen ongoing ATO guidance and litigation, so current advice matters.

A worked example

Say a director draws $60,000 from her company during the year for personal costs, with no salary or dividend put through. If nothing is documented and the amount is not repaid before the company's lodgment day, the $60,000 can be assessed to her as an unfranked deemed dividend. If instead a complying loan agreement is signed in time, there is no deemed dividend at that point, but she must make minimum yearly repayments — often funded by future salary or dividends. This is an illustration only; the right approach depends on the facts.

When to get advice

The clean-up options narrow sharply once the company's lodgment day passes, so the best time to review shareholder loan accounts is before the return is lodged — ideally as part of year-end planning while there is still room to move. If you have old undocumented loans, an unpaid trust entitlement owed to a company, or a loan account that only ever grows, those are worth reviewing now rather than after an ATO enquiry.

Does Division 7A still apply if I repay the money?

Repayments made before the company's lodgment day for that year can reduce or eliminate the deemed dividend, but repayments that are quickly re-borrowed may be disregarded under anti-avoidance rules.

What interest rate does a Division 7A loan have to charge?

At least the benchmark interest rate, which the ATO sets each financial year — check the current ATO figure when preparing the agreement or calculating minimum yearly repayments.

Can the company just pay me a salary or a dividend instead?

Yes — salary (with PAYG withholding and super obligations) and properly declared dividends are the standard ways to take profit out of a company. Each has different tax consequences, so the mix is worth planning each year rather than defaulting to drawings.