Division 7A is the Australian tax rule that treats a payment, loan or other benefit from a private company to a shareholder or their associate as an unfranked dividend. A loan escapes that only if, by the company's lodgment day, it's repaid or put on a written complying loan agreement with interest at least the benchmark rate (8.77% for the year ending 30 June 2027) and a term of no more than 7 years, or 25 if secured by a mortgage.
It exists to stop company profits reaching owners tax free. If you run your business through a Pty Ltd and take funds out of the company that aren't wages, director's fees or a declared dividend, Division 7A is probably already in play. Everything below comes from the ATO's Division 7A pages and its benchmark interest rate table.
What Division 7A catches
The ATO says a payment or benefit can be treated as a dividend even if the parties call it a loan, an advance, a gift or a debt write-off. It can also apply when the benefit goes through another entity, or where a trust has allocated income to a private company without paying it and then provides a benefit to the company's shareholder. A 'loan' includes any credit or financial accommodation that's in substance a loan.
It doesn't apply to amounts already taxed elsewhere, such as normal dividends or director's fees. And a payment or loan isn't a dividend if it's repaid or converted into a complying loan by the company's lodgment day for that income year, which ties Division 7A to the company's tax return deadline.
The transactions it covers
The ATO lists the payments and benefits Division 7A can apply to, directly or indirectly, when they go to a shareholder or an associate:
| Transaction | Legislative category | Everyday example |
|---|---|---|
| Private use of company assets | Payment (section 109C) | Using the company car or holiday unit for personal trips |
| Transfer of company assets | Payment (section 109C) | Moving equipment or property into your own name |
| Gifts | Payment (section 109C) | Company pays a personal bill |
| Loans and other credit | Loan (section 109D) | Drawing on the company account between pay runs |
| Writing off a debt | Debt forgiveness (section 109F) | Company forgives what a shareholder owes it |
| Guarantees, trust entitlements, interposed entities | As above, indirectly | A trust or related entity passes the benefit on |
The legislation treats the private use of a company asset as a payment whether or not there's a formal lease or licence; an informal right of use is enough. If a benefit other than a loan goes to the shareholder in their capacity as an employee, fringe benefits tax can apply instead of Division 7A, so the same car can fall under different rules depending on why it's provided.
The three conditions for a complying loan
- A written loan agreement in place before the company's lodgment day for the income year the loan was made.
- Interest each year at least equal to the Division 7A benchmark interest rate.
- A maximum term of 25 years if 100% of the loan is secured by a registered mortgage over real property worth at least 110% of the loan (after any prior-ranking debts), or 7 years for any other loan.
There's no set format, but the agreement should identify the lender and borrower, state the amount, the draw-down date, the minimum yearly repayment requirement, the interest rate and the term, and be signed and dated by the lender.
The benchmark interest rate
The benchmark is the Reserve Bank's standard variable owner-occupier housing loan rate last published before the start of the income year, and it doesn't change if the RBA later revises it.
| Income year ended 30 June | Benchmark rate |
|---|---|
| 2027 | 8.77% |
| 2026 | 8.37% |
| 2025 | 8.77% |
| 2024 | 8.27% |
| 2023 | 4.77% |
| 2022 | 4.52% |
These apply to companies with a 30 June year end. A company with a substituted accounting period uses the rate last published before its own year started; the ATO's example is a company starting its year on 1 November 2022, whose rate was 6.77%.
Minimum yearly repayments
Once a loan is on a complying agreement, minimum yearly repayments have to be made in each later income year, and they only count if made by 30 June of the year they're due. Any shortfall is treated as a Division 7A dividend in that year. The minimum is worked out on the 'amalgamated loan', meaning all loans to the same shareholder or associate in the year with the same term. The interest is assessable income for the company, and the ATO's Division 7A calculator and decision tool works out the repayment for you.
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How a deemed dividend is taxed
- It's assessable to the shareholder or associate as an unfranked dividend, taken to be paid at the end of the income year.
- The company generally can't frank it, so it doesn't touch the franking account. Exceptions: family law obligations, and you can apply to frank one caused by an honest mistake or inadvertent omission.
- The total deemed dividends in a year are capped at the company's distributable surplus, which isn't necessarily the same as its profit.
- A later real dividend set off against the loan isn't taxed again if it's unfranked.
Loans to a shareholder in their capacity as an employee don't create fringe benefits tax, whether or not the loan complies.
The verdict
Because a deemed dividend is unfranked, the ATO itself says the most effective way to give a shareholder a benefit is usually to pay a normal dividend with franking credits. If you've already drawn funds, the fix is time-limited: repay it or sign a complying loan before the company lodges, then diarise the 30 June repayment every year.
Thinking about company tax more broadly? I've covered the Australian rates in my guide to Australia's company tax rates.
Frequently asked questions
What is Division 7A?
An Australian tax rule that treats loans, payments and benefits from a private company to shareholders or their associates as unfranked dividends unless an exception applies.
What is the Division 7A benchmark interest rate for 2027?
8.77% for income years ending 30 June 2027.
How long can a Division 7A loan run?
Up to 7 years, or 25 years if fully secured by a registered mortgage over real property worth at least 110% of the loan.
When must Division 7A minimum repayments be made?
By 30 June of the income year in which each repayment is due.
