Division 7A Tax Australia 2026-27: Company Loans Explained

Short answer: If your private company lends money to you (or your spouse, kids, or family trust), Division 7A can treat it as an unfranked dividend and tax you at your full marginal rate. The way out is simple on paper: repay it before the company’s tax return lodgment day, or put it on a complying loan agreement charging at least the ATO’s benchmark interest rate — 8.77% for 2026-27 — with a 7-year term (25 years only if secured by a registered mortgage over real property). Miss the steps and the tax bill lands on you, not the company.

How Division 7A works

Division 7A lives in Part III of the Income Tax Assessment Act 1936. It is an integrity rule with a simple logic: profits of a private company should come out to shareholders as dividends (or wages), taxed properly — not slip out the back door as informal “loans” that never get repaid.

Certain transactions are deemed to be dividends for tax purposes even if everyone involved calls them something else. The deemed dividend is included in the recipient’s assessable income — unfranked, meaning no franking credit to soften it.

That unfranked detail matters more than most people realise. A normal franked dividend carries a credit for tax the company already paid. A Division 7A deemed dividend carries nothing. The company already paid company tax on the profits, and then you pay personal tax on top at your full marginal rate. It is the worst of both worlds, and it is entirely avoidable.

Division 7A applies to private companies — not public companies — and to benefits provided to shareholders or their associates: your spouse or de facto partner, your children (including adult children), your parents, companies you control, and trusts you can benefit from. A loan to your partner’s name does not hide it from the ATO.

What triggers a deemed dividend

Division 7A catches three types of transactions, plus private use of company assets. If any of these happen without proper arrangements, the amount becomes an unfranked deemed dividend in the recipient’s hands (capped at the company’s distributable surplus for the year — roughly, what the company could legally distribute).

Loans

The most common trigger, by a wide margin. A “loan” under Division 7A is far broader than a bank-style loan. It includes advances of money, provision of credit, and financial accommodation. Real-world triggers include:

• Transferring company funds to your personal bank account
• Paying personal expenses from the company account — mortgage, credit cards, car payments
• A director’s loan account drifting into debit over the year because drawings exceeded what the company owed you
• Parking company money in your personal mortgage offset account
• Paying for a personal property deposit from company funds

Payments

Amounts the company pays for the benefit of a shareholder or associate — paying your personal bills directly, for instance — are treated as dividends unless they are otherwise assessable (like properly declared salary or director’s fees) or converted into a complying loan.

Debt forgiveness

If the company forgives a debt you owe it, the forgiven amount is a deemed dividend. This one bites at clean-up time: directors who try to “write off” an old loan account balance often discover they have just manufactured a taxable dividend.

Private use of company assets

Division 7A is not only about cash. Living in a company-owned property, or private use of a company car or holiday home, can be treated as a deemed dividend based on the market value of the private use. (If the benefit goes to you as an employee, fringe benefits tax may apply instead — get advice on which one catches your situation.)

The Division 7A benchmark interest rate for 2026-27

Every complying loan must charge at least the ATO’s benchmark interest rate, reset each year from the Reserve Bank’s variable housing loan indicator rate published before 1 July. You cannot lock in last year’s rate — each year’s minimum repayment uses that year’s rate.

For 2026-27, the rate is 8.77%, up from 8.37% the previous year, per the ATO’s published table. Check the current figure on the ATO’s Division 7A benchmark interest rate page before you calculate anything — it is the one number in this area that changes annually.

Complying loan agreements: the rules that keep you safe

A loan will not be treated as a deemed dividend if, by the company’s lodgment day for the income year the loan was made, it is either fully repaid or placed on a complying loan agreement. Lodgment day is the earlier of the return’s due date or the date it is actually lodged — lodging early brings the deadline forward.

A complying loan agreement must satisfy all of the following:

• In writing, before the deadline. A written agreement signed and dated by both parties, in place before lodgment day. No prescribed format, but it must identify the lender and borrower and set out the amount, term, interest rate, and repayment obligations. Journal entries made after the fact do not count.
• Minimum interest rate. At least the benchmark interest rate for each year of the loan — not just the first year.
• Maximum term. 7 years for unsecured loans. Up to 25 years only if the whole loan is secured by a registered mortgage over real property whose market value (after deducting prior-ranking debts) is at least 110% of the loan amount.

Then, for each subsequent income year, you must make a minimum yearly repayment (MYR) by 30 June. The MYR is calculated with this formula:

MYR = (P × I) ÷ (1 − (1 ÷ (1 + I))^T)

Where P is the loan balance at the end of the previous year, I is that year’s benchmark rate, and T is the remaining term in years. The ATO offers a Division 7A calculator and decision tool that runs this for you.

If the repayment falls short of the MYR, the shortfall is treated as an unfranked deemed dividend in the borrower’s hands.

How to fix a non-complying loan: step by step

Found a loan that was never documented, or realised last year’s MYR was missed? Work through these steps in order — do not skip ahead.

Step 1 — Quantify it. Total every advance, payment, and forgiven amount for the relevant year. Your accountant will also check the company’s distributable surplus, which caps the deemed dividend.

Step 2 — Check the deadline. Has the company’s lodgment day for that year passed? If not, you can still repay in full or execute a complying loan agreement now. If it has passed, a deemed dividend has already arisen — but you can still stop further dividends from arising in later years.

Step 3 — Make the agreement complying, or repay. If you are still within time, repay the full amount or sign a written loan agreement with the correct term and benchmark interest rate. If the deadline passed, put a complying agreement in place anyway so no new deemed dividends arise.

Step 4 — Calculate and catch up the minimum yearly repayment. Run the MYR formula (or the ATO tool) for each year. Pay genuine amounts — real transfers, not journal entries. An offset must be against a genuinely existing liability (a declared dividend or salary, say), agreed before 30 June.

Step 5 — If a deemed dividend already arose, talk to your accountant about voluntary disclosure. The Commissioner has discretion to disregard a deemed dividend that arose from an honest mistake, or to allow it to be franked — but you must voluntarily disclose and take corrective action. Silence is the one option that never helps.

Step 6 — Fix the cash flow habit. Most Division 7A problems come from a director’s loan account drifting into debit unnoticed. Set up a proper drawing or wage structure so personal spending does not masquerade as a loan next year.

Worked example: a $120,000 shareholder loan in 2026-27

Let’s make this concrete. During 2025-26, your private company lends you $120,000 and you make no repayments before lodgment day. You put it on a 7-year unsecured complying loan agreement charging 8.77% (the 2026-27 benchmark rate). Your first minimum yearly repayment, due by 30 June 2027:

• P = $120,000 (nothing repaid yet)
• I = 8.77% = 0.0877
• T = 7 years remaining

MYR = ($120,000 × 0.0877) ÷ (1 − (1 ÷ 1.0877)⁷) = $10,524 ÷ 0.4448 = $23,661 (rounded)

You must pay the company at least $23,661 by 30 June 2027. Of that, $10,524 is interest — assessable income to the company — and $13,137 reduces the principal. Next year you recalculate with the new benchmark rate and the reduced balance.

Now the cost of missing. Suppose you only manage $15,000. The shortfall is $23,661 − $15,000 = $8,661, deemed an unfranked dividend in your hands. In the 37% marginal bracket that is roughly 39% including the 2% Medicare levy — about $3,378 of extra tax on money you already received. Use the income tax calculator to see what your marginal rate does to a deemed dividend of any size.

Common mistakes that trigger Division 7A

• “I repaid it before 30 June, so I’m fine.” Only if the repayment was genuine. Repay in June and reborrow the same amount in July — or repay with money borrowed from the same company — and the law disregards the repayment. You are treated as never having paid it.
• Backdating paperwork. A journal entry records a transaction; it does not create one. An agreement signed “as at” an earlier date will not satisfy the ATO.
• Locking in an old interest rate. Your agreement must charge at least the benchmark rate for each year. Set it to track “the ATO benchmark rate for the relevant year” rather than a fixed number.
• Using the company credit card for personal spending. This is a payment to a shareholder, plain and simple. Unless it is recorded as salary or a declared dividend, it is a Division 7A amount.
• Forgetting the family net. Loans to your spouse, adult children, or family trust are all in scope. Division 7A does not care whose name is on the transfer.
• Repaying the MYR with a loan from the same company. Borrowing to make the repayment is specifically disregarded. The repayment must come from your own resources, or from a genuinely existing mutual liability like a declared dividend or salary offset agreed before 30 June.

Practical tips for company directors

• Keep personal and company finances physically separate. One personal bill paid from the company account is how most of these problems start.
• Reconcile the director’s loan account monthly, not at tax time. A debit balance found in May can be repaid by June; one found in August is a deemed dividend.
• Diary the MYR due date (30 June) and the lodgment-day deadline separately — they are different dates and confusing them is expensive.

Division 7A and family trusts: the Bendel decision

If your group uses a family trust with a corporate beneficiary (a “bucket company”), this area changed in June 2026.

When a trust distributes income to a company beneficiary but keeps the cash, the company holds an unpaid present entitlement (UPE). For over 15 years, the ATO’s position was that an unpaid UPE was effectively a loan from the company back to the trust, triggering Division 7A unless placed on complying loan terms.

On 10 June 2026, the High Court ruled in Commissioner of Taxation v Bendel [2026] HCA 18 — a 5:2 majority for the taxpayer — that a UPE does not, without more, constitute a loan for Division 7A purposes. Simply leaving a trust entitlement unpaid no longer automatically manufactures a Division 7A loan.

That is not a free pass. If the trust later pays, lends to, or forgives a debt of the company’s shareholder or associate, other Division 7A provisions (Subdivision EA) can still apply, and section 100A’s anti-avoidance rules for reimbursement agreements are untouched. If your UPE loan agreements were set up under the old ATO position, have your adviser review whether they are still needed.

Frequently asked questions

Can I use company money for a personal property deposit?

You can, but the moment company funds go to you or an associate, Division 7A is in play. Either repay it before the company’s lodgment day for that year, or document it as a complying loan with at least the 8.77% benchmark interest and proper MYRs. An undocumented deposit advance is one of the most common deemed dividends accountants see.

I repaid the loan before 30 June and reborrowed it in July. Am I in the clear?

No — this is the single most common Division 7A trap. If a reasonable person would conclude you intended to reborrow a similar or larger amount when you made the repayment, the repayment is disregarded and you are treated as having received an unfranked dividend equal to the amount. The same applies to repaying with funds borrowed from the same company. Repayments must be genuine and permanent.

Can the company charge me a lower interest rate since it’s my own company?

Not if you want the loan to comply. A complying loan must charge at least the ATO benchmark rate (8.77% for 2026-27) for each year of the loan. Charge less and the whole outstanding amount can be deemed a dividend. If 8.77% feels steep, a properly franked dividend may cost you less overall.

Does Division 7A apply to my spouse or family trust, or just to me?

It applies to all of them. “Associate” is deliberately wide — spouse, de facto partner, children, parents, companies you control, and trusts you benefit from. Routing the loan through a family member’s account changes nothing except adding another party to the problem.

What happens if I miss a minimum yearly repayment by honest mistake?

The shortfall becomes a deemed unfranked dividend for that year. But the Commissioner can exercise discretion to disregard a deemed dividend arising from an honest mistake, or allow it to be franked — you must voluntarily disclose the error in writing and take corrective action. Talk to your accountant promptly.

Do I still need complying loan agreements for trust UPEs after the Bendel decision?

Probably not for a simple unpaid entitlement left sitting with the trust — the High Court held in June 2026 that a UPE is not, of itself, a Division 7A loan. But review each arrangement individually: if the trust has paid or lent funds to you or your associates, or forgiven your debts, Division 7A can still apply through other provisions, and section 100A remains in force. Do not unwind existing agreements without advice.

Final word

Division 7A is not complicated at its core: do not take company money without either repaying it, documenting it properly, or declaring it as income. For 2026-27 the benchmark rate is 8.77%, the agreement must be written before lodgment day, and the minimum repayments must actually be paid. Get those three right and Division 7A is a non-event; get them wrong and you pay tax twice on the same money.