Division 7A: taking money out of your own company without a deemed dividend

The Division 7A benchmark interest rate published by the ATO is 8.37% for the 2025–26 income year. If your company lent you money during 2024–25, or paid your personal expenses, you have until the company's lodgment day to repay it or put it under a complying written loan agreement. Miss that date and the amount is treated as an unfranked dividend in your hands. Not the interest on it. The whole amount.

Most Division 7A problems were never intended as loans. They are private expenses paid from a company account, posted to a loan account, and not looked at again until the return is being prepared.

What Division 7A actually catches

Division 7A of the *Income Tax Assessment Act 1936*, on the Federal Register of Legislation, treats three things as dividends when a private company provides them to a shareholder, or to an associate of a shareholder:

• Payments — including transferring a company asset to you, or letting you use one privately, whether or not there is a formal lease or licence
• Loans — and "loan" is wider than a signed facility. It reaches advances, the provision of credit, and any other form of financial accommodation
• Forgiven debts — writing off what a shareholder or associate owes the company

"Associate" is broad. Your spouse, your children, your family trust and another company you control are all associates. The ATO's list of payments and other benefits affected by Division 7A also covers guarantees, private use of company assets, transactions through interposed entities, and payments or loans by a trust where a company has an unpaid present entitlement.

A Division 7A dividend is generally not frankable. The shareholder is taxed on the full amount with no credit attached to it.

Lodgment day is the deadline, not 30 June

A private company's lodgment day is the earlier of the due date for lodgment of its income tax return and the day it actually lodges. That is the date the whole regime turns on, and it is not 30 June.

Before lodgment day you have three options, and only three:

• Repay the amount in full
• Put it under a complying written loan agreement
• Do neither, and accept a deemed dividend

Lodge the company return early and you shorten your own deadline. That is the whole rule — there is no discretion in it. If you need the time, the tax compliance work has to be sequenced so the loan account is dealt with before the return goes in, not after.

What makes a loan agreement complying

The ATO sets out three criteria for a complying Division 7A loan:

• A written agreement, in place before the company's lodgment day for the year the money was paid out
• An interest rate for each year after the year the loan is made that at least equals the benchmark interest rate
• A term within the statutory maximum

There are two maximum terms. Seven years for an unsecured loan. Twenty-five years where the whole of the loan is secured by a mortgage over real property registered under a State or Territory law, and where, when the loan is first made, the market value of that property less any liabilities secured over it in priority to the loan is at least 110% of the loan amount.

There is no prescribed form for the agreement. As a minimum it should identify the parties, state the amount, the term, the requirement to repay and the interest rate, and be signed and dated.

The minimum yearly repayment

No interest is payable for the year the loan is made. The first minimum yearly repayment falls in the year after that, and it must be paid by 30 June.

The formula is:

MYR = (P × I) ÷ (1 − (1 ÷ (1 + I))^T)

Where P is the amount of the loan not repaid by the end of the previous income year, I is the current year's benchmark interest rate, and T is the remaining term in years. At an unchanged rate, paying exactly the minimum gives the same figure every year and clears the loan by the end of the term. What moves it is the benchmark rate resetting each 1 July.

A worked example

This is an example, not a client. A Robina building company pays $200,000 of its director's private costs during the 2024–25 income year — school fees, a car, a renovation. Every one goes to his loan account.

The company's lodgment day for its 2024–25 return is 15 May 2026. Before that date the loan is documented: unsecured, seven years, interest at the benchmark rate. No deemed dividend arises for 2024–25.

The first minimum yearly repayment is for 2025–26, at 8.37%, over a remaining term of seven years:

• P × I = $200,000 × 0.0837 = $16,740
• 1 ÷ 1.0837 = 0.922765, raised to the power of 7 = 0.569687
• 1 − 0.569687 = 0.430313
• $16,740 ÷ 0.430313 = $38,902

He has to pay the company $38,902 by 30 June 2026. He pays $20,000. The $18,902 shortfall is a deemed dividend, unfranked, assessable to him in 2025–26. At the top marginal rate plus the Medicare levy, 47%, that is $8,884 of tax on money he spent eighteen months earlier.

And the dividend does not reduce the debt. He still owes the balance, and the 2026–27 minimum repayment still has to be made.

Had the same loan been secured by a registered mortgage over real property with a market value of at least $220,000 and nothing secured over it in priority, a 25-year term would have been available and the first minimum repayment would have been $19,331. Same debt, half the annual cash. The trade-off is the registered mortgage and a much longer run of interest.

Repaying with money the company just lent you does not count

Section 109R of the Act disregards a repayment where a reasonable person would conclude that, when the payment was made, the borrower intended to obtain a loan from the same company of a similar or larger amount — or had already obtained one in order to make the payment.

Paying the minimum on 29 June with money drawn back out on 2 July is the oldest version of this. The section exists because of it.

The distributable surplus cap

The total of all dividends a private company is taken to pay under Division 7A in an income year is capped at its distributable surplus for that year. If the provisional dividends exceed the surplus, each is scaled back proportionately.

Distributable surplus is not retained earnings. It is a statutory formula, and only present legal obligations and certain provisions are counted as liabilities, so a company's distributable surplus can exceed the retained earnings shown on its balance sheet.

A company with no distributable surplus has no deemed dividend. That is not a strategy. It is an accident of one year's balance sheet, it is recalculated every year, and the underlying loan is still there.

Unpaid present entitlements are unsettled

Where a trust resolves to distribute to a corporate beneficiary and the cash is never paid across, the company holds an unpaid present entitlement. Whether that is a Division 7A loan is, as at April 2026, before the High Court.

The ATO's published view is Taxation Determination TD 2022/11: by not calling for payment, the corporate beneficiary provides financial accommodation to the trustee, and that is a loan under section 109D(3). Note the direction. The company is the lender and the trust is the borrower, so the deemed dividend runs from the company to the trust and out to its beneficiaries. TD 2022/11 applies to trust entitlements arising on or after 1 July 2022; earlier entitlements are still governed by TR 2010/3 and PS LA 2010/4.

The Full Federal Court disagreed. In *Commissioner of Taxation v Bendel* [2025] FCAFC 15, decided on 19 February 2025, it held that section 109D(3) requires an obligation to repay, not merely an obligation to pay, and that an unpaid present entitlement is therefore not a loan. The Commissioner was granted special leave to appeal on 12 June 2025, the High Court heard the appeal on 14 October 2025, and judgment has not been delivered.

What matters in the meantime is set out in the ATO's interim decision impact statement on Bendel. Pending the outcome, the ATO is administering the law in accordance with TD 2022/11. It does not propose to finalise amended assessments, private ruling applications or objection decisions that turn on the question. But where a decision has to be made — because a period of review is about to lapse, or the taxpayer requires an objection decision — it will decide on its existing view.

This is litigated, not settled. It is not a basis for restructuring a trust distribution, and it is not a reason to leave one undocumented. Getting the structuring right before 30 June is worth more than a position that depends on a judgment nobody has read.

Where these actually arise

The ATO's own guidance on managing Division 7A risks puts it plainly: Division 7A dividends may inadvertently arise from a failure to keep private expenses separate from company expenses, and the fix is not to pay private expenses from a company account at all.

That is the source of almost every one of these. Nobody signs a loan agreement for a $180 phone bill. They sign one for the $200,000 the phone bills added up to over four years, and by then several income years have already closed.

Two things prevent it. A loan account that is reconciled monthly rather than reconstructed in April, so the number is known while there is still time to act on it. And a decision each year about how profit actually comes out — the ATO notes that the most effective way to distribute retained profits may be to pay a dividend, with a franking credit if one is available, and have the shareholder report it.

If a repayment is missed

A shortfall against the minimum yearly repayment is treated as a dividend, subject to the distributable surplus cap, unless the Commissioner exercises a discretion.

There are two. The first applies where the shareholder or associate satisfies the ATO that the repayment was missed because of circumstances beyond their control and that undue hardship would result. The ATO weighs their ability to repay, what reduced it, whether all reasonable steps were taken, and whether the shortfall was paid as soon as possible afterwards.

The second applies where a deemed dividend arises from an honest mistake or inadvertent omission. There the Commissioner may disregard the dividend or allow it to be franked, usually subject to conditions such as making the payments that should have been made, within a set time. You generally have to apply, in writing, and demonstrate the mistake.

Neither is automatic, and neither is a substitute for the agreement.