Many business owners do not realise that taking money out of their company as a “loan” can trigger unexpected tax consequences. It is one of the most common issues we see when we review a new client’s structure, and it is almost always fixable if it is caught early.
Division 7A is the Australian tax rule designed to stop private company profits being distributed to shareholders or their associates tax free through loans, payments or forgiven debts. Used properly, a Division 7A loan is a legitimate way to access company funds to manage personal cash flow, purchase assets or fund investments. Used carelessly, it turns into a deemed dividend and an unexpected tax assessment.
What makes a Division 7A loan compliant?
To avoid a loan being treated as a taxable dividend, it generally must be:
- Documented under a complying Division 7A loan agreement
- Charged at or above the ATO benchmark interest rate
- Repaid through minimum yearly repayments over the prescribed loan term
The benchmark interest rate is set by the ATO and changes from year to year, so a loan you set up several years ago is not on a fixed rate for life. For the 2026-27 income year the benchmark rate is 8.77%.
Loan terms are usually seven years for an unsecured loan, or up to 25 years where the loan is secured by real property that meets the ATO’s requirements.
A worked example: a $50,000 Division 7A loan
Consider a shareholder who borrows $50,000 from their private company under a standard seven year complying Division 7A loan. Assume the loan is made during 2025-26, so the first repayment year is 2026-27, and the 2026-27 benchmark rate of 8.77% applies for the life of the loan.
- Loan amount: $50,000
- Interest rate: 8.77%
- Loan term: 7 years
- Annual repayment: approximately $9,858
- Total repayments over 7 years: approximately $69,006
- Total interest paid: approximately $19,006
Repayment schedule
| Year | Opening balance | Interest | Principal repaid | Annual repayment | Closing balance |
|---|---|---|---|---|---|
| 2026-27 | $50,000.00 | $4,385.00 | $5,472.98 | $9,857.98 | $44,527.02 |
| 2027-28 | $44,527.02 | $3,905.02 | $5,952.97 | $9,857.98 | $38,574.05 |
| 2028-29 | $38,574.05 | $3,382.94 | $6,475.04 | $9,857.98 | $32,099.01 |
| 2029-30 | $32,099.01 | $2,815.08 | $7,042.90 | $9,857.98 | $25,056.11 |
| 2030-31 | $25,056.11 | $2,197.42 | $7,660.56 | $9,857.98 | $17,395.54 |
| 2031-32 | $17,395.54 | $1,525.59 | $8,332.40 | $9,857.98 | $9,063.15 |
| 2032-33 | $9,063.15 | $794.84 | $9,063.15 | $9,857.98 | $0.00 |
The part most people miss
The interest paid on the loan becomes assessable income for the company. Assuming the company qualifies for the 25% company tax rate, it would pay roughly $4,751 in tax on the interest it earns over the life of the loan.
So the $50,000 you borrowed actually costs:
- Original loan: $50,000
- Total repayments: $69,006
- Total interest paid: $19,006
- Company tax on that interest income at 25%: $4,751
Division 7A loan or extra salary? The numbers may surprise you
A common assumption is that borrowing from the company is cheaper than paying yourself more salary. It is worth running the numbers before you decide.
Take a business owner already earning a salary of $120,000 who needs an additional $50,000, and assume there is no interest deductibility on the loan.
Option 1: $120,000 salary plus a $50,000 Division 7A loan
- Personal tax and Medicare levy: $29,188
- Initial cash available: $140,812
- Loan repayments over seven years: $69,006
- Total interest paid: $19,006
- Company tax on interest income at 25%: $4,751
Option 2: $170,000 salary
- Personal tax and Medicare levy: $47,638
- Cash retained after tax: $122,362
The loan option delivers an immediate tax saving of roughly $18,450 compared with taking the money as salary. But over the life of the loan, the interest of $19,006 plus company tax on that interest of $4,751 adds up to about $23,757.
In other words, what looks like a tax saving today is often a cash flow benefit that carries a longer term cost.
How can repayments be made?
There is more than one way to meet your minimum yearly repayment:
- Contributing personal funds to the loan
- Declaring a dividend and applying it against the loan, rather than actually drawing the cash
- Any combination of the above
- And yes, you can repay the loan early if your cash flow allows
What business owners should do
If you have a shareholder loan account, or you are thinking about drawing funds from your company, the practical steps are straightforward:
- Check whether a complying loan agreement is actually in place and signed
- Confirm the interest rate applied matches the ATO benchmark rate for the relevant year
- Diarise the minimum yearly repayment so it is not missed
- Review the loan account before year end rather than after
- Model the full cost against the alternatives before you borrow
Maintaining proper documentation, making repayments on time and getting advice before the money moves are what keep a Division 7A arrangement out of trouble.
Frequently asked questions
What happens if I miss a minimum yearly repayment? The shortfall can be treated as an unfranked deemed dividend and included in your assessable income for that year. In some circumstances the Commissioner has discretion to disregard the dividend, but that relief is not automatic and is far harder work than making the repayment on time.
Does the benchmark interest rate change? Yes. The ATO sets it each income year. For 2026-27 it is 8.77%. Your minimum repayment is recalculated using the current year’s rate, so your repayment amount can move.
Can my company just forgive the loan? Forgiving a debt owed by a shareholder or associate is itself caught by Division 7A and can trigger a deemed dividend. It is not a shortcut.
Is a Division 7A loan ever the right answer? Often, yes. It can be an effective way to access company funds where the alternative is a large tax bill in a single year. The point is to go in with the full cost understood rather than assuming it is free money.
Talk to us before you draw the funds
Division 7A is one of those areas where a conversation before the money moves is worth far more than a fix afterwards. If you would like us to review your shareholder loan account, model the cost of a proposed loan, or compare it against salary and dividend options, the team at Professional Business Advisory would be glad to help.
Call us on +61 417 733 869 or get in touch to arrange a review.
Note: Actual minimum yearly repayments are calculated under ATO rules and may vary depending on the timing of the loan, repayment dates and individual circumstances. This article is general information only and does not take your personal circumstances into account. Professional advice should be obtained before entering into a Division 7A loan arrangement.