Division 7A compliance: Managing shareholder loans without creating deemed dividends

Published Thursday 9 July 2026

Table of contents

• What is Division 7A?
• When Division 7A applies to loans
• What is a complying Division 7A loan?
• How to avoid a deemed dividend
• Repayments and records required by the ATO
• Get Division 7A under control with Xero
• FAQs on Division 7A loans

Key takeaways

• Division 7A can treat loans, payments or forgiven debts to shareholders and their associates as a deemed dividend unless you act by lodgment day.
• A complying loan needs a written agreement, the ATO benchmark interest rate and either a seven-year unsecured or 25-year secured term.
• Making at least the minimum yearly repayment each year and keeping clear records helps you avoid shortfalls and extra tax.
• The amount treated as a deemed dividend is capped at the company's distributable surplus for that year.

What is Division 7A?

Division 7A is an Australian Taxation Office (ATO) anti-avoidance rule that treats certain loans, payments and forgiven debts from a private company to its shareholders or their associates as taxable deemed dividends.

Division 7A is a section of Australia's tax law that applies to improperly distributed company profits to shareholders or their associates to prevent them from dodging tax obligations. When a private company distributes profits among shareholders legally, this is known as a dividend, and requires tax on that payout. If the ATO (Australian Taxation Office) finds you distributing company funds without complying to Division 7A dividend requirements, that can be classed as a “deemed dividend”, resulting in a slap on the wrist in the form of higher tax.

A compliant Division 7A loan is a way for shareholders to legally pull funds from the company for personal use, as a loan with interest you pay back within seven years. While this makes the process more complex, it prevents you from paying extra tax on that amount.

When Division 7A applies to loans

Receiving company funds can be considered a Division 7A loan when the business lends an amount to a shareholder, or an associate of one. Div 7A is a way of treating that loan as a dividend to make sure it’s taxed appropriately. Division 7A compliance means shareholders treat the company as a bank applying interest on loans, rather than an ATM from which to withdraw cash without paying tax.

Division 7A can also apply beyond straight loans. A payment the company makes on behalf of a shareholder or associate, or a debt it forgives or waives, can be caught by the same rules and treated as a deemed dividend.

Excluded transactions

Some loan-related transactions don’t trigger Division 7A treatment, including:

• loans paid back before tax lodgement day

• loans made to individuals or other businesses rather than shareholders or their associates

• loans solely for acquiring additional rights or shares in the business

• loans that comply to Division 7A by way of an agreement

How Division 7A applies to UPEs

A UPE (unpaid present entitlement) starts as a distribution from a trust to a company, which caps the tax on that amount at the company's rate. Instead of paying it out, the trust keeps the funds to use.

For years the ATO treated an unpaid UPE like a loan that could trigger Division 7A. That changed with the High Court's decision in Commissioner of Taxation v Bendel on 10 June 2026, which found that a UPE isn't a loan for Division 7A purposes, so it doesn't automatically create a deemed dividend. Other tax rules can still apply to UPEs, so it's worth confirming your position with your advisor.

Distributable surplus formula

The distributable surplus formulais the calculation used to work out the maximum amount the ATO can treat your loan as a deemed dividend under Division 7A. Even if you borrowed more than your distributable surplus figure for the year, only up to that amount can be assessed as a deemed dividend.

Here’s the formula:

Distributable surplus = Net assets + Division 7A amounts - non-commercial loans - paid-up share value - repayments of non commercial loans

Here’s what those terms mean:

• Net assets: the sum of your assets minus your liabilities in your balance sheet

• Division 7A amounts: previous Division 7A loans or payments from throughout the year

• Non-commercial loans: amounts already treated as Division 7A dividends in this or earlier income years

• Paid-up share value: the money shareholders originally invested in the business

• Repayments of non commercial loans: any repayments of previous loans via dividend

What is a complying Division 7A loan?

A complying Division 7A loan is a formal agreement that allows you to withdraw funds from the business for personal use, without it being classed as a deemed dividend and attracting excessive tax. Essentially, this is how to show the ATO that you’re not extracting dividends without paying tax, and that you intend to pay that money back to the business with interest as a legitimate loan. Division 7A compliance starts with a rock-solid loan agreement.

Loan terms to use

There are two types of term you can use for a complying Division 7A loan:

• Unsecured loan: seven years maximum to repay the loan

• Secured Loan: 25 years maximum to repay, must be secured by mortgage over real property

What the loan agreement includes

In order for the loan agreement to be compliant with the ATO’s requirements for a Division 7A loan, the following conditions must be met, and clearly set out in the loan agreement:

• the agreement must be in writing

• the loan must use the minimum (benchmark) interest rateset out by the ATO annually

• the lendee must meet the yearly Division 7A minimum repayment requirement

How to avoid a deemed dividend

A deemed dividend isn’t something that automatically triggers, but rather is a condition that the ATO can impose on money you’ve received from the company without taxation. Typically, this happens when they catch these transactions through review of the company’s yearly income tax assessment or your individual tax return.

The best way to avoid a deemed dividend is to take action with your Division 7A loan before lodgement day, or set it up correctly from the get-go. Here’s how you can do this:

Choosing the right option

There are several routes you can take to clean up a loan under Division 7A to make it compliant and avoid deemed dividend penalties. The options are to:

• Repay the loaned money. Returning the money to the company before lodgement day wipes the slate clean. This avoids any taxation on the amount borrowed if it’s repaid in time.
• Treat it as salary or a bonus. Paying out smaller loaned amounts through single-touch payroll with tax withheld as PAYG. However, this will be at your personal tax rate, likely higher than the business’s.
• Declare it a “franked dividend." Using the officially compliant method of paying out dividends to shareholders, applying franking credits to the amount and avoiding being effectively double-taxed on that dividend. Franking credits are tax offsets, applying the tax the business has already paid on that money to your personal income tax return.
• Convert it into a complying Div 7A loan. Implementing a loan agreement to treat the amount as an official, ATO-compliant loan under Division 7A. This agreement must include the ATO’s specified conditions to be compliant.

Setting up the loan agreement

There are a few essential parts required to make an official agreement acceptable to the ATO. The necessary components to include in your loan agreement are:

• the names of all parties involved

• term of the agreement (seven-year unsecured or 25-year secured)

• interest rate applied

• the requirement to repay

• the amount and term off the loan

• signatures of all parties

• applicable dates

Calculating the minimum yearly repayment

You can work out your Division 7A minimum yearly repayment (MYR) to pay back on your loan with the following calculation:

1. Take the current year’s benchmark interest rate and multiply it by the remaining (as yet unpaid) loan amount from the previous income year.
2. Add together the number one plus the current year’s interest rate and divide the number one by that figure.
3. Index the amount from step two to the power of the number of years remaining on the loan term.
4. Subtract the step three amount from the number one.
5. Divide the amount from step one by the amount from step four.

Offsetting MYR with a dividend

One legal way to repay your Division 7A loan, other than from your own pocket, is to use compliant dividends to offset your repayment obligations. That means you as a shareholder receive legitimate dividends from the company at the fully franked rate. The benefit is that you receive your dividend at a lower tax rate than your personal marginal rate, except the money stays with the company to contribute to your repayment rather than landing in your bank account.

Repayments and records required by the ATO

Below are some important aspects of the strict Division 7A loan repayment and record requirements of the ATO.

Interest rate for Division 7A loans

The minimum Division 7A interest rate for 2026, as required for compliance with the ATO, is 8.37%. This is known as the benchmark interest rate, and changes every year.

Where to find and use a Div 7A calculator

The ATO website features a useful Div 7A calculatorthat you can use to work out your MYR, or minimum yearly repayments. To use this tool, you’ll need to have the following information ready:

• amount and date of payments toward the loan

• term of the loan

• the relevant income year to the loan

• remaining amount of the loan to be repaid by previous income year

Other calculatorsthat can help to work out your business’s profitability, tax obligation, or cashflow can also help you determine how your business is tracking in relation to gathering dividend-ready profits.

What happens if you miss the MYR

If you miss the minimum yearly repayment for an income tax year, that outstanding amount will be treated as a deemed (in other words, unfranked) dividend on your personal tax return. This means the amount is taxed at the personal marginal rate and the company can’t attach franking credits to reduce the tax payable. In basic terms, whatever money you fail to repay that year becomes a double-taxed dividend under Division 7A.

If you do happen to miss the MYR by honest mistake or inadvertent omission, you can take “corrective action”, in which case a commissioner may exercise discretion and disregard the deemed dividend, or allow franking credits to be applied:

• voluntarily disclose the mistake and request discretion in writing

• take corrective action by catching up on missed payments

Get Division 7A under control with Xero

Keeping track of Division 7A loans, repayments, and interest can be a major distraction from what you really want to do – run a successful business. Xero helps to monitor loan balance accounts, schedule repayments, review available credit for distributable surplus, separate interest and principle, and code drawings to keep your dividend payments compliant.

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FAQs on Division 7A loans

Here are a few straightforward answers to common questions about Division 7A loans:

What is the maximum amount for a Division 7A loan?

There is no maximum amount for a loan taken from a company’s distributable surplus. Rather, Div 7A regulates how that payout is taxed. The amount that can be treated as a deemed dividend does, however, cap at the amount of distributable surplus of the company for that year.

Can interest be capitalised on a Division 7A loan?

No, the ATO requires you to make your minimum yearly Division 7A loan repayments before tax lodgement day, which includes the principle and interest.

Can multiple loans be amalgamated for repayments?

Yes, multiple loans can be amalgamated into a single loan where there are several complying Division 7A loan agreements for one shareholder or associate. These loans need to have the same maximum term.

When is the lodgment day for putting a loan agreement in place?

The lodgement day for putting a complying Division 7A loan in place is the company's tax return lodgement date, unless the actual date of lodgement happens to be earlier.

Do credit card payments for shareholders trigger Division 7A?

In short, they can. Using a company credit card to pay for personal expenses can be considered payment on behalf of a shareholder, which avoids paying income tax on that money in the process. This can trigger Division 7A, treating it as an unfranked dividend, unless the payment is declared as a salary or accounted as an ATO-compliant dividend.