Running a business in the company structure – watch out for Division 7A application

Last updated: June 2026

Division 7A of the Income Tax Assessment Act 1936 exists to stop private companies from passing profits to their shareholders (or associates of shareholders) tax-free — whether that's by way of cash payments, loans, or forgiven debts.

Where Division 7A applies, the amount or value involved is treated as an unfranked deemed dividend in the hands of the recipient and taxed accordingly — generally at the recipient's marginal tax rate, with no franking credit to soften the blow.

A loan from a private company will not be treated as a deemed dividend if it is put on terms that comply with the tax law — a "complying loan agreement" — before the company's tax return lodgment date for the income year in which the loan was made.

What Makes a Loan a "Complying Loan"?

To be a complying loan agreement, a loan must satisfy all of the following:

• it must be in writing;
• it must be in place by the company's lodgment date for the income year the loan was made;
• the loan term must not exceed 7 years (extendable to 25 years for loans secured by a registered mortgage over real property, subject to strict conditions); and
• the interest rate charged must be at least the ATO's benchmark interest rate for each year of the loan.

The benchmark rate has moved since this was last reviewed. After rising to 8.77% for the 2024–25 income year, it now sits at 8.37% for the 2025–26 income year. Because the rate is reviewed annually, the minimum yearly repayment (see below) must be recalculated every year using the rate that applies for that year.

"In Writing" Means a Real Agreement — Not Just a Constitution Clause

A recent Administrative Review Tribunal decision, Botella v FCT [2026] ARTA 604, is an important reminder of how literally the "in writing" requirement is applied.

In that case, the taxpayer argued that a clause in the company's constitution — which "deemed" every shareholder loan to be made on the terms of a pro-forma agreement attached as a schedule — was sufficient to satisfy section 109N. The Tribunal disagreed. A constitution is an agreement among the company's members generally; it is not, by itself, an agreement between the company and the individual borrower about a specific loan.

What this means for you: if your Division 7A loans are documented only by reference to a clause in your company's constitution, they may not be complying loans at all — meaning the full loan balance could be treated as a deemed dividend in the year the loan was made. Every loan (or loan facility) needs its own properly signed agreement between the company and the borrower personally. We recommend reviewing your existing loan documentation with us as a priority.

Minimum Yearly Repayments

Once a complying loan agreement is in place, the borrower must make a minimum yearly repayment (MYR) to the company each year.

• If the MYR is not made (or is short) for a year, the shortfall is itself treated as an unfranked deemed dividend for that year — capped at the company's distributable surplus (broadly, its profits available for distribution) at that time.
• The MYR is recalculated at the start of each income year, based on the loan's opening balance for that year, the current year's benchmark interest rate, and the number of years remaining in the loan term, using the formula set out in the tax law:

MYR = Loan balance at the start of the year × r ÷ [1 − (1 + r)⁻ⁿ]

where r = the Division 7A benchmark interest rate for the income year, expressed as a decimal (e.g. 0.0837 for 8.37%), and n = the number of years remaining in the loan's term, including the current year.

Paying by Journal Entry? You Still Need Paperwork

The ATO accepts that a minimum yearly repayment can be made "on paper" — for example, by setting off the repayment against a fully franked dividend the company declares to the shareholder, or against salary, wages or director's fees the company owes the shareholder.

However, the ATO has been explicit that a journal entry raised after 30 June, on its own, is not enough. For a set-off to be effective there must be:

1. a genuine obligation owed by the shareholder to the company (the MYR);
2. a genuine, separate obligation owed by the company to the shareholder (e.g. a declared dividend or resolved director's fee);
3. an agreement between the parties to set these off against each other, dated and executed by 30 June of the relevant income year; and
4. journal entries reflecting all of the above when the accounts are prepared.

Miss any of these steps and the ATO can disregard the "repayment" altogether — leaving the full MYR exposed as a deemed dividend. If you're planning a journal-entry repayment, please talk to us before 30 June so we can make sure the dividend resolution, set-off agreement and timing are all correctly documented.

Important: "Repay and Redraw" Arrangements No Longer Get the Benefit of the Doubt

This is the area where the ATO's approach has hardened the most — and it affects anyone who treats their company's bank account like a personal line of credit, drawing money out when needed and putting money back in when they can.

Under section 109R, a repayment to the company can be completely disregarded for Division 7A purposes — meaning it does not count toward your loan repayment or MYR at all — if either of the following applies:

• a reasonable person would conclude that, when you made the repayment, you intended to borrow a similar or larger amount again from the company; or
• you had already borrowed a similar or larger amount from the company shortly before making the repayment, in order to fund it.

Critically, this does not require any deliberate intention to avoid Division 7A — it can apply purely based on the pattern of transactions. If a repayment and a related drawdown (before or after) are connected in this way, the repayment is treated as if it never happened, and the full MYR shortfall becomes a deemed dividend for that year.

This was previously a lower-risk, often-overlooked area — that has now changed. The ATO has identified "repay and redraw" arrangements as a specific compliance focus for the 2025–26 income year, and a recent ATO determination (TD 2025/5) confirms the same outcome can apply even where the repayment is funnelled through another related entity rather than made directly.

There are limited exceptions: a repayment that is genuinely set off against a dividend, wages or director's fees the company owed you (rather than funded by a new drawdown) is not disregarded under section 109R, even if you later borrow again. This is why the journal-entry/set-off process described above — done properly — remains a legitimate way to meet your MYR.

What this means for you: if you've been making payments into the company before year-end and then drawing funds back out shortly after (or vice versa), please talk to us. We can help assess whether your arrangements are exposed under section 109R, and restructure them — typically via a properly documented dividend set-off — before they create an unexpected tax bill.

Using Company Assets for Private Purposes

If you (or an associate) use a company asset — a vehicle, holiday property, boat, etc. — for private purposes, the value of that benefit (broadly, what you would pay to use it on commercial terms) is treated as a deemed dividend and taxed in your hands, even though no cash changes hands.

The ATO's Message Hasn't Changed — But the Audit Activity Has

The ATO's core message remains the same: if you take money or assets out of your private company, there will be tax consequences. There is no such thing as a tax-free payment or benefit from a private company — and, as outlined above, there is no longer a tax-free way to "roll over" a repayment by redrawing the funds.

What has changed is the level of scrutiny. The ATO's earlier Division 7A awareness campaign has now moved into an active compliance and audit phase for the 2025–26 income year, with specific attention on:

• unreported or undocumented shareholder loans and payments;
• loan agreements that don't satisfy section 109N — including reliance on constitution clauses, as discussed above;
• minimum yearly repayments calculated using the wrong benchmark interest rate, or not made at all;
• "repay and redraw" arrangements, as discussed above; and
• private companies guaranteeing loans that third parties (such as banks) make to shareholders.

Talk to Us Before You Act

A Division 7A deemed dividend is unfranked, taxable at your marginal rate, and generally can't be undone after the event. Before you:

• draw further funds from the company;
• repay a loan — particularly close to 30 June — if there's any chance you'll need to redraw similar funds soon after; or
• rely on existing loan agreements you haven't reviewed recently,

please contact our office first. A short conversation now is far cheaper than an unexpected deemed dividend, the tax payable on it, and the ATO attention that's likely to follow.

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This article provides general information only and does not take into account your personal circumstances. It is not a substitute for individual advice. Please contact our office to discuss how these rules apply to your situation.