If you own a private company, Division 7A is the rule most likely to turn an ordinary bank transfer into a tax bill. It exists because company profits are taxed at 25% or 30%, while shareholders on high incomes pay up to 45% plus Medicare. Without Division 7A, owners could leave profits in the company and "borrow" them forever, never paying the top-up tax.
So the law treats money a private company gives to its shareholders or their associates as a dividend, unless it's dealt with properly. The dividend is unfranked, which means the company tax already paid on that profit doesn't count. This guide explains what triggers Division 7A, how to put a complying loan in place, the 2026–27 numbers, what changed for trust entitlements after the High Court's 2026 decision, and how to fix a problem.
What is Division 7A?
Division 7A sits in Part III of the Income Tax Assessment Act 1936. It applies when a private company does any of these for a shareholder or an associate of a shareholder (a spouse, relative, a related trust or company):
| Trigger | Examples |
|---|---|
| Pays them | Paying the director's personal credit card, school fees or home renovation from the company account |
| Lends to them | Drawings recorded in a director's loan account; a transfer to the family trust; an "advance" |
| Forgives a debt they owe | Writing off the director's loan account |
| Lets them use a company asset | A holiday house or boat owned by the company and used by the family for free or below market rent |
| Does any of the above through another entity | The company lends to an unrelated party or a related trust, which passes the money on to the shareholder |
Each of these is treated as an unfranked dividend in the shareholder's (or associate's) hands, unless an exception applies or it's fixed in time. The amount is capped at the company's distributable surplus, broadly its net assets less paid-up share capital, with some adjustments.
What isn't caught
- Amounts that are already taxable to the person, such as wages, director's fees and properly declared dividends
- Benefits provided to a shareholder as an employee that are taxed under the fringe benefits tax rules instead (a company car provided as part of a salary package, for example). FBT and Division 7A don't both apply to the same benefit, so the question becomes which one does, and which costs less
- Loans to another company (unless that company is a trustee)
- Loans made in the ordinary course of business on the company's usual commercial terms to everyone (a bank lending to customers, for example)
- Payments of genuine debts the company owes the person, such as repaying a loan the shareholder made to the company
- Loans repaid, or put on a complying loan agreement, before the company's lodgment day
How do I make a Division 7A loan comply?
A loan to a shareholder or associate avoids a deemed dividend if, before the company's lodgment day for the year the loan was made:
- There's a written loan agreement. Signed and dated before the lodgment day. Agreements prepared after the fact don't work.
- Interest is at least the benchmark rate for each year after the year the loan is made.
- The term doesn't exceed: - 7 years for an unsecured loan, or - 25 years for a loan secured by a registered mortgage over real property, where the property's market value (less any prior-ranking debts) is at least 110% of the loan when it's made.
The lodgment day is the earlier of the due date for the company's tax return and the day it's actually lodged.
The benchmark interest rate
| Company income year ending 30 June | Benchmark rate |
|---|---|
| 2027 (the 2026–27 year) | 8.77% |
| 2026 | 8.37% |
| 2025 | 8.77% |
| 2024 | 8.27% |
| 2023 | 4.77% |
| 2022 | 4.52% |
There's one rate for each year, applied to every complying loan, whether 7-year or 25-year, and whether the loan started this year or six years ago. The jump from under 5% to over 8% from 2023–24 roughly doubled the minimum repayment's interest component on many loans.
What is the minimum yearly repayment?
For each year after the year the loan is made, the shareholder must repay at least the minimum yearly repayment (MYR). It's a standard loan repayment that covers interest at the benchmark rate and enough principal to clear the loan by the end of the term.
The formula is: MYR = loan balance × r ÷ (1 − (1 + r)^−n), where r is the benchmark rate for the year and n is the remaining term in years. It's recalculated each year with the new benchmark rate.
Worked example: a $100,000 loan in 2026–27
Hypothetical, rounded. Loan made during the 2025–26 year and documented before that year's lodgment day. 2026–27 is the first repayment year, with the full term remaining.
| 7-year unsecured loan | 25-year secured loan | |
|---|---|---|
| Opening balance at 1 July 2026 | $100,000 | $100,000 |
| Benchmark rate | 8.77% | 8.77% |
| Minimum yearly repayment for 2026–27 | $19,716 | $9,992 |
| Of which interest (if repaid on 30 June) | $8,770 | $8,770 |
| Of which principal | $10,946 | $1,222 |
If repayments are made earlier in the year, interest is lower because it's calculated on the reducing balance, so the principal portion is higher.
If the shareholder repays less than the MYR by 30 June, the shortfall is a deemed dividend for that year. Paying the rest on 1 July doesn't fix it.
How can the shareholder make the repayment?
- Cash from personal funds.
- A dividend set-off. The company declares a franked dividend and the shareholder agrees in writing to set it off against the loan. Paperwork must be in place by 30 June.
- A salary or bonus set-off, with PAYG withheld and reported. The salary must be genuine and it's taxable to the shareholder.
Watch out: Repaying the loan and then borrowing back a similar amount soon after can be ignored for Division 7A purposes. The repay-and-reborrow rule is aimed at exactly that circular move around 30 June. If you need the money back, deal with it as a new loan with its own agreement, or don't take it out.
What does a deemed dividend actually cost?
Hypothetical, round numbers, 2026–27 resident rates.
A director takes $60,000 out of the company during 2026–27 for personal expenses, coded to a loan account. Nobody prepares a loan agreement before the lodgment day. The director's other income puts them in the 37% bracket. The company is a base rate entity paying 25%.
| Deemed dividend (no agreement) | Franked dividend declared properly | |
|---|---|---|
| Amount received | $60,000 | $60,000 cash dividend |
| Franking credit | None | $20,000 (at 25%) |
| Taxable amount | $60,000 | $80,000 |
| Personal tax at 39% (37% plus 2% Medicare) | $23,400 | $31,200 |
| Less franking credit | $0 | −$20,000 |
| Tax payable by the director | $23,400 | $11,200 |
The company already paid $20,000 of tax on the profit behind that $60,000. A deemed dividend wastes it: the director pays the top-up tax as though no company tax had been paid. Over a few years, unmanaged loan accounts cost far more than the advice to fix them.
How does Division 7A work with trusts and UPEs?
Many family groups have a discretionary trust that distributes income to a company beneficiary (a "bucket company") without paying it in cash. The amount the trust owes the company is an unpaid present entitlement, or UPE.
The ATO's old view
From 1 July 2022, the ATO said (in TD 2022/11) that when a company beneficiary left a UPE unpaid, it was providing "financial accommodation" to the trust, which was a loan for Division 7A. Groups had to pay out UPEs or put them on complying loans.
What changed in 2026
On 10 June 2026, the High Court decided Commissioner of Taxation v Bendel [2026] HCA 18. By a 5–2 majority, it held that a subsisting UPE owed by a trust to a corporate beneficiary is not a loan for Division 7A, including under the "financial accommodation" limb. The ATO's view was wrong in law.
The ATO's decision impact statement of 26 June 2026 accepts that, where a company has taken no action in relation to its UPE, it won't treat the UPE as a Division 7A loan. It has said TD 2022/11 will be withdrawn. As at 18 October 2026, check the ATO's legal database for whether the formal withdrawal has issued.
What still applies
Bendel narrowed Division 7A, but it didn't make UPEs risk-free:
- Subdivision EA still applies. If the trust pays, lends or forgives money to a shareholder of the company (or their associate) while the company's UPE is unpaid, that amount can be a deemed dividend from the trust.
- Section 100A still applies to arrangements where a beneficiary's entitlement is really enjoyed by someone else. See our guide to trust distributions and section 100A.
- Existing complying loans put in place for UPEs under the old view are real loans. They continue on their terms and repayments still have to be made.
- Steps that turn a UPE into a loan (for example, the company agreeing to lend the amount back to the trust) are still treated as loans.
- Law change is possible. A long-announced measure to bring UPEs into Division 7A by legislation has not been introduced, and is not law. Separately, a Bill introduced on 14 October 2026 proposes a 30% minimum tax on discretionary trusts from 1 July 2028. That Bill is not law either, but it changes the economics of bucket companies if it passes.
Our bucket company guide covers how this affects trust-and-company structures.
How do I fix a Division 7A problem?
The right fix depends on timing.
| Where you are | Options |
|---|---|
| Before the lodgment day for the year the loan arose | Repay the loan; put it on a complying written agreement; declare a franked dividend or salary and set it off; or a mix |
| After 30 June, minimum repayment missed | The shortfall is a deemed dividend for that year. Consider a request to the Commissioner (below) |
| After the lodgment day, no agreement in place | The full amount is a deemed dividend for the year the loan was made. Consider a request to the Commissioner |
| Old, messy loan accounts | Reconcile them first. Many "loans" turn out to be partly repaid, partly wages, partly company expenses |
Asking the Commissioner to disregard a deemed dividend
The Commissioner has a discretion to disregard a deemed dividend, or allow it to be franked, where it arose from an honest mistake or inadvertent omission. The ATO looks at the circumstances, whether you've fixed it promptly (usually by putting a complying loan in place and making the repayments you should have made), and your compliance history. It isn't automatic, and it's not available for deliberate arrangements. A well-prepared request is worth doing when the amounts are significant.
Mistakes we see with Division 7A
- Private expenses paid from the company account and coded to "sundries" instead of the loan account.
- Loan agreements signed after the lodgment day, sometimes backdated. That makes it worse, not better.
- Using last year's benchmark rate for this year's MYR.
- Repaying on 30 June and redrawing on 1 July.
- Lodging the company return early, which brings the lodgment day forward and shortens the time to get a loan agreement in place.
- The family using the company's holiday house without paying market rent.
- Forgetting associates. A loan to your spouse, your adult child or your family trust is caught too.
- Dividend set-offs without paperwork by 30 June.
- Assuming Bendel ended all UPE risk, while the trust pays the shareholders' bills.
- Never reviewing old 25-year loans, where the security has fallen below the 110% test or the mortgage was never registered.
How BPAG manages Division 7A for your company
On our plans, your director's loan account is reconciled during the year, not discovered at tax time. Before 30 June we tell you the minimum repayment and how to meet it.
Our Division 7A agent reconciles the loan account from your Xero ledger, calculates the minimum yearly repayment, the benchmark interest and any shortfall, and builds the workpaper. Our dividend statements agent prepares the franking, resolution and dividend statements if a dividend set-off is the fix. Your accountant checks the calculations, explains the options to you, and signs off before anything is lodged. The agents draft; a qualified accountant reviews and approves. Loan agreements and any mortgage for a 25-year loan are legal documents prepared by a solicitor, and we brief them directly.
Division 7A is part of every company tax return we prepare. If your group has a company and a family trust, it belongs in your tax planning as well. For the tax rates involved, see our company tax rate guide, and for the bigger structural questions our business structuring and asset protection service.
Frequently asked questions
What is the Division 7A benchmark interest rate for 2026–27?
8.77% for private companies with an income year ending 30 June 2027. It was 8.37% for the year ending 30 June 2026. The ATO publishes the rate each year after the Reserve Bank releases its indicator lending rate, and every complying loan uses the current year's rate, not the rate when the loan started.
Is Division 7A interest taxable to the company?
Yes. The interest the shareholder pays on a complying loan is assessable income of the company. Whether the shareholder can deduct it depends on what they used the money for: interest on money used to buy a rental property or shares can be deductible; interest on money spent privately isn't.
Can a Division 7A loan be forgiven?
It can, but forgiving a loan to a shareholder or associate is itself treated as a deemed dividend in the year of forgiveness, unless an exception applies (such as forgiveness in bankruptcy). Forgiving a loan doesn't make the problem go away; it usually just changes the year it arises.
Does Division 7A apply to sole traders or trusts?
Division 7A applies to private companies. A sole trader has no company, so there's nothing to apply it to. Trusts aren't companies, but Division 7A can still reach trust arrangements in two ways: where a trust has an unpaid entitlement to a company and lends or pays money to the company's shareholders, and where a company's money passes through a trust to a shareholder.
What is the lodgment day for Division 7A?
It's the earlier of the due date for the company's tax return and the date it actually lodges. A loan made during the year must be repaid, or put on a written complying agreement, by that day. If you lodge the company return early, you shorten your own deadline.
Does a loan between two companies in the same group trigger Division 7A?
Generally no. Loans from one company to another company are excluded, unless the borrowing company is acting as trustee of a trust. But if the money then passes to a shareholder, the look-through rules can apply. Map the flow of money, not just the first step.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.