Div 7A is the part of the tax law that catches company owners who take money out of the business for the mortgage, a holiday or the kids’ school fees, when it wasn’t a wage or a dividend. If that’s you, the ATO may already treat the money as a loan, with interest. And if the loan isn’t set up properly, it can be taxed like a dividend anyway.
The fix is mostly timing and paperwork: know what’s in your director’s loan account, deal with it before your company’s lodgment day, and if it stays a loan, make it a proper one.
In Episode 30 of Business Uncut, Reuben walks through what Division 7A is, why it bites, the four steps that keep you on the right side of it, and the traps to avoid.
Key takeaways
- Company money that isn’t wages or a dividend lands in your director’s loan account: a running tab of what you owe the company.
- If that tab is in debit and isn’t sorted in time, Division 7A can treat it as a deemed dividend, usually with no franking credits.
- The deadline is your company’s lodgment day, not 30 June. Repay it, convert it to wages or a dividend, or put a written loan agreement in place.
- A compliant loan is in writing, charges at least the benchmark interest rate and needs a minimum yearly repayment by 30 June.
What Div 7A is, and why it bites
Your company is a separate person in the eyes of the law. It has its own bank account, its own tax return, and it pays company tax, usually 25% or 30%. You don’t, at least not yet.
When company money moves to you personally, the system expects you to pay personal tax on it, through a wage or a dividend (a payment of the company’s profit to its shareholders). Division 7A is the rule that stops you treating company money like your own pocket money without paying that tax.
How a director’s loan account builds up
You transfer $20,000 to clear the credit card. The company pays your car lease. A family trip goes on the company card. None of that money vanishes. It lands in your director’s loan account, which is a running tab of what you owe the company.
If that tab is in debit and isn’t sorted by a certain deadline, the ATO treats it as a deemed dividend. “Deemed” just means treated as though it happened, even though you never declared one.
Deemed dividends are usually unfranked, so you get no credit for the company tax already paid. You could be paying your full marginal rate, up to 47 cents in the dollar including Medicare, on money you thought was just sitting there quietly. If taking cash as you need it is your default, our guide to paying yourself from your business covers the cleaner options.
Hypothetical: a $6 million construction business
Say, hypothetically, you run a construction business turning over $6 million. Over the year you pull out $150,000 for a house deposit, a boat and more than the odd holiday. No wage, no dividend. Come tax time, nobody has put a loan agreement in place.
Hypothetical example
That whole $150K can be taxed in the owner’s hands, with no franking credits.
That whole $150,000 can be taxed in your hands, with no franking credits. That isn’t a penalty for doing something dodgy. It’s just what happens when nobody is watching the tab.
Step 1 Know your number
Before anything else, find out whether your director’s loan account is in debit, meaning you owe the company money. You can’t fix what you can’t see, and plenty of owners genuinely don’t know.
Hypothetically, if your Xero shows a loan account that’s been creeping up for three years, you might have three years of Div 7A risk stacked on top of each other. The principle: check the tab every quarter, not just at tax time.
Step 2 Deal with it before the deadline
You have three options:
- Pay it back.
- Convert it into something taxable on purpose, like a wage or a dividend.
- Put a written loan agreement in place.
The date that matters isn’t 30 June. It’s your company’s lodgment day for that year, which is the earlier of when the company tax return is due and when it’s actually lodged. So if your accountant lodges early, your window shuts early.
Hypothetically, say a loan was made last financial year and the company return is going in next month. The agreement has to be signed before then. The principle: the paperwork comes before the lodgment, never after.
The paperwork comes before the lodgment, never after.
Step 3 If it’s a loan, make it a real one
A compliant Division 7A loan has to:
- be in writing
- charge at least the benchmark interest rate
- run for no more than seven years, or up to 25 years if it’s secured by a registered mortgage over real property.
The ATO sets and publishes the benchmark rate each financial year, so your accountant will have the current figure. Why charge interest at all? Because the law wants it to look like a commercial loan, not a freebie.
That interest is income to the company, so the company pays tax on it. The principle: a proper loan costs something, and that’s the point.
Step 4 Make the minimum yearly repayment by 30 June
Every year of the loan there’s a minimum repayment, worked out using an ATO formula. Think of it like a home loan repayment: a slice of principal plus that year’s interest, so the whole thing is cleared by the end of the term.
Hypothetically, say you borrowed $140,000 over seven years. Your first repayment will land well into five figures once the interest is added. Miss it, or fall short, and the shortfall is treated as a dividend for that year. The principle: diarise 30 June like it’s your BAS.
Funding the repayments
Most owners fund the repayments by declaring a dividend or taking a bit more salary, then using that money to pay down the loan. That’s completely legitimate. You’re still paying tax, but on your own timing, and with franking credits if it’s a properly franked dividend.
That’s the whole game with Div 7A: control the timing, keep the credits, and never let the ATO make the decision for you.
Three Div 7A traps that catch owners out
- The round trip. You pay the loan down on 29 June, then pull the same money straight back out in July. The ATO can ignore a repayment funded by fresh borrowing from the company, so the loan is treated as if it was never repaid.
- It’s not just you. Payments to your spouse, your kids or a related trust can get caught too, and so can free use of a company asset, like living in a house the company owns. Yes, the company holiday house counts.
- Trusts and bucket companies. If your family trust distributes to a bucket company (a company set up to catch trust profits), unpaid distributions can drag you into Division 7A as well. With the proposed minimum tax on trusts from 1 July 2028, which was announced in the May Budget but isn’t law yet, a lot of those structures are going to get a fresh look anyway. Our trust vs company comparison covers that proposal.
Your one job this week
This week
Open your accounting software, find your director’s loan account and write down the balance. Then send your accountant, or your bookkeeper, one question: is this in debit, and is there a signed loan agreement covering it?
That’s it. Five minutes, which is less time than your morning coffee.
Frequently asked questions
What is Div 7A?
Div 7A, short for Division 7A, is the tax rule that stops company owners treating company money as their own without paying tax on it. Money you take out that isn’t a wage or a dividend, and isn’t sorted by the deadline, can be treated as a deemed dividend, usually unfranked.
What does it mean if my director’s loan account is in debit?
It means you owe the company money. If that balance isn’t repaid, converted into a wage or dividend, or put under a written loan agreement before the company’s lodgment day, Division 7A can treat it as a deemed dividend.
When is the Div 7A deadline?
For dealing with the balance, it isn’t 30 June. It’s the company’s lodgment day for that year: the earlier of when the company tax return is due and when it’s actually lodged. Once a compliant loan is in place, the minimum yearly repayment is due by 30 June each year.
What makes a Div 7A loan agreement compliant?
It has to be in writing, charge at least the benchmark interest rate the ATO sets each financial year, and run for no more than seven years, or up to 25 years if secured by a registered mortgage over real property. The minimum yearly repayment is then due by 30 June each year.
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General information only, not personal tax, legal or financial advice. Figures are hypothetical examples. Talk to your adviser about your own situation.
