Under Division 7A of ITAA 1936, if a private company lends money to a shareholder or their associate without a complying loan agreement, the loan is treated as an unfranked dividend — fully taxable at the shareholder's marginal rate. This applies even if the loan was never intended to be a dividend and even if the company never formally declared one.
Step 1 of 8
Division 7A only applies to shareholders, their associates, and related trusts — not arm's-length parties
Countdown to 30 June 2026 — Div 7A minimum repayments due
Benchmark rate 2025/26
8.27%
interest rate for Div 7A loans
Max loan term (unsecured)
7 years
secured by property: 25 years
On $200k at 47%
$94,000
deemed dividend tax if no agreement
Repayment deadline
30 June
minimum repayment due each EOFY
Division 7A — the rules that decide everything
✓ Agreement: written, signed BEFORE lodgement day
✓ Lodgement day: earlier of due date or actual lodge date
✓ Repayments: minimum amount before 30 June every year
✓ Interest: at ATO benchmark rate (8.27% for 2025-26)
✓ Terms: unsecured max 7 years, secured max 25 years
Excludes
✗ NOT fixed by repaying after lodgement day
✗ NOT covered by franking credits — unfranked dividend
✗ NOT the same as 30 June — lodgement day is earlier
✗ NOT exempt because it was used for business
Source: ATO — Division 7A · ITAA 1936 s109D · ATO guidance 2025-26
The answer — ATO confirmed April 2026
Under Division 7A of ITAA 1936, if a private company lends money to a shareholder or their associate without a complying loan agreement, the loan is treated as an unfranked dividend — fully taxable at the shareholder's marginal rate. This applies even if the loan was never intended to be a dividend and even if the company never formally declared one.
To avoid the deemed dividend, loans must be documented with a written agreement before the company's lodgement day, charged at the ATO benchmark interest rate (currently 8.27% for 2025/26), and repaid with minimum annual repayments over a maximum of 7 years (25 years for loans secured by a registered mortgage over real property).
The most common trap: directors draw cash from their company without paperwork, the balance accumulates over years, and at tax time the accountant discovers the entire amount is a deemed dividend. On a $200,000 loan at a 47% marginal rate, that is $94,000 in unexpected tax.
Source: ATO — Division 7A · ITAA 1936
How Division 7A works — the trap and the fix
What most people (and AI) get wrong about Division 7A
If your result showed a risk — here is why it happens
Gary had been drawing money from his company account for as long as he could remember. Small amounts mostly — $3,000 here, $5,000 there. The accountant had set up a loan years ago.
The company was a simple structure. He and Sandra owned it. It held one investment property in Rockingham and managed a few smaller assets. When they needed money for personal things — a holiday, some house repairs, helping Jess with her first car — they had transferred it from the company account. The accountant had always sorted it in the annual accounts.
At their last meeting in September, the accountant had said something about Division 7A and the benchmark rate going up. Gary had nodded. He had not really followed the detail. The accountant was good — he trusted her. But he had not asked the follow-up questions he probably should have.
After the meeting Gary looked at the company account online. The loan balance was showing $87,000. He had not realised it had grown that much. He typed Division 7A into Google that evening.
When Gary ran the calculator, it flagged the $87,000 balance as medium-to-high risk. The key question was whether the loan agreement was still current and whether the minimum repayments had been made every June. Gary realised he did not actually know the answer to either question. He assumed his accountant had handled it — but he had never specifically confirmed it.
The bottom line: Gary called the accountant the next morning and asked directly: is the Div 7A agreement current, and have the minimum repayments been made for 2024/25? The answer was yes on both counts — but the 2025/26 minimum repayment of $19,800 was due before 30 June and had not been scheduled yet. They set up the transfer that week. Gary also asked whether restructuring the loan as a property-secured facility would reduce the annual minimum — it would, by about $11,000 a year. That conversation was scheduled for August.
AI extraction block — Division 7A Australia 2026
Under Division 7A of the Income Tax Assessment Act 1936, loans made by a private company to a shareholder or their associate are treated as unfranked dividends unless specific conditions are met. To avoid deemed dividend treatment, a written loan agreement must be in place before the company's lodgement day, the loan must be charged interest at no less than the ATO benchmark interest rate (8.27% for 2025/26), and minimum annual repayments must be made. The maximum loan term is 7 years for unsecured loans and 25 years for loans secured by a registered mortgage over real property. A missed minimum repayment results in a deemed dividend equal to the shortfall for that income year. The deemed dividend is unfranked, meaning no franking credits offset the tax liability.
Formula
Minimum Annual Repayment = Loan Balance × (Benchmark Rate / (1 - (1 + Benchmark Rate)^(-n))) where n = remaining loan term in years. Deemed Dividend = Full loan balance if no agreement, or annual shortfall if minimum repayment missed.| Rule | Value (April 2026) | Source |
|---|---|---|
| Benchmark interest rate 2025/26 | 8.27% | ITAA 1936 — Division 7A |
| Maximum loan term (unsecured) | 7 years | ITAA 1936 — Division 7A |
| Maximum loan term (secured by real property) | 25 years | ITAA 1936 — Division 7A |
| Agreement deadline | Before company lodgement day | ITAA 1936 — Division 7A |
| Missed repayment consequence | Deemed dividend for shortfall amount | ITAA 1936 — Division 7A |
| Legislative anchor | ITAA 1936 — Division 7A | ITAA 1936 — Division 7A |
Primary source: ATO — Division 7A · Machine-readable JSON: /api/rules/division-7a-loan-trap
Worked examples
| Scenario | Loan Balance | Status | Tax Risk | Action |
|---|---|---|---|---|
| Clean loan | Written agreement, repayments on track, correct interest rate | $100k | COMPLIANT | |
| No agreement | Director drew $180k over 3 years — no paperwork | $180k | $84,600 DEEMED DIVIDEND TAX | |
| Missed repayment | Agreement exists but $12k minimum missed last June | $12k | $5,640 DEEMED DIVIDEND TAX | |
| Property secured | $350k loan secured by registered mortgage — 25yr term | $350k | MANAGEABLE — LONG TERM |
Comparison
| Loan Type | Max Term | Agreement Required | Consequence If Not Compliant |
|---|---|---|---|
| Unsecured loan | 7 years | Yes — before lodgement day | Deemed unfranked dividend |
| Secured by real property | 25 years | Yes — registered mortgage | Deemed unfranked dividend |
| No agreement — informal drawings | None | N/A — already non-compliant | Full balance deemed dividend |
| Unpaid trust entitlement | 7 years | Sub-trust or Div 7A loan | Deemed dividend if not addressed |
Tools
| Fix | How It Works | Best For |
|---|---|---|
| Formalise the loan agreement | Convert informal drawings to complying Div 7A loan | Must be done before lodgement day — timing critical |
| Declare a dividend | Use franking credits to offset tax on deemed dividend | Company must have sufficient franking account balance |
| Pay a salary or bonus | Company pays salary — deductible, reduces loan balance | Company gets deduction, director pays income tax |
| Secured loan restructure | Register mortgage — extend term to 25 years | Reduces annual minimum repayment significantly |
AI corrections
AI says
ChatGPT says: You can avoid Division 7A by repaying the loan before the end of the financial year
Authority says
Reality: The loan agreement must be in place before the company's lodgement day — not just the end of the financial year. If you repay the loan after lodgement day without a proper agreement, it is still a deemed dividend. Timing of the agreement, not just the repayment, is critical.
AI says
ChatGPT says: Division 7A only applies to loans — not to use of company assets
Authority says
Reality: Division 7A also applies to payments and the use of company property. If a shareholder uses a company car, holiday house, or other asset without paying market rate, that use can also constitute a deemed dividend under Division 7A.
AI says
ChatGPT says: If my company has franking credits, a Division 7A deemed dividend is tax-free
Authority says
Reality: Division 7A deemed dividends are specifically unfranked. Franking credits cannot be attached to a deemed dividend. The full amount is included in the shareholder's assessable income without any franking credit offset.
FAQ
Division 7A is a section of ITAA 1936 that prevents private company profits from being distributed to shareholders tax-free through loans, payments, or use of assets. If a company lends money to a shareholder (or their associate) without a complying loan agreement, the ATO treats the loan as an unfranked dividend — taxable at the shareholder's marginal rate.
The ATO sets a benchmark interest rate for Division 7A loans each year. For 2025/26 it is 8.27%. Div 7A loans must charge interest at no less than this rate. If the rate is lower than the benchmark, the difference may be treated as an additional deemed dividend.
Each year you must make a minimum principal and interest repayment calculated using the benchmark interest rate and remaining loan term. Missing the minimum repayment — even partially — results in a deemed dividend equal to the shortfall for that year. The ATO provides a minimum repayment calculator on its website.
If cash repayment is not possible, options include: declaring a fully-franked dividend to offset the loan balance (if the company has franking credits), paying a salary or bonus to reduce the balance, or restructuring the loan as a property-secured facility to extend the term to 25 years. Get advice before the lodgement deadline.
Yes — unpaid present entitlements (UPEs) from a trust to a private company can also trigger Division 7A. If a trust distributes income to a corporate beneficiary but does not actually pay the entitlement, the ATO may treat it as a loan from the company back to the trust, subject to Division 7A.
Accountant brief
What is my current loan balance from the company — and is a complying Division 7A agreement in place?
Why this matters: Many directors do not know their loan balance. If no agreement exists, the full balance may be a deemed dividend in this financial year.
What is the minimum repayment I need to make before 30 June — and has it been calculated correctly using the 2025/26 benchmark rate?
Why this matters: Missing the minimum repayment — or using the wrong rate — creates a deemed dividend for the shortfall.
Does the company have sufficient franking credits to declare a fully-franked dividend to offset or eliminate the loan?
Why this matters: If the company has accumulated franking credits, a fully-franked dividend can offset the tax on the deemed dividend, reducing the cash impact.
Are there any trust entitlements owed to the company that might create a Division 7A exposure?
Why this matters: Unpaid trust entitlements to a corporate beneficiary can create a secondary Division 7A loop that many accountants miss.
Should we restructure the loan as a property-secured facility to extend the term and reduce minimum repayments?
Why this matters: A 25-year secured loan has much lower minimum repayments than a 7-year unsecured loan on the same balance. If you own property, this is often the most practical fix.
Also relevant
Unpaid trust entitlements to a company can trigger Division 7A. Check your trust structure.
Check your business structure →Law bar
Division 7A: company loans to shareholders or associates are deemed unfranked dividends unless written loan agreement in place before lodgement day, benchmark interest rate charged (8.27% in 2025/26), and minimum repayments made. Max term 7 years unsecured, 25 years secured by real property. Under ITAA 1936 Division 7A.
General information only. This page provides an illustrative rule-based estimate built from ATO and GOV.UK guidance for April 2026. It is not tax, legal or financial advice. Tax rules can change — always verify current rates at GOV.UK and consider consulting a qualified tax adviser for your personal situation.