Division 7A
Division 7A loans — plain-English explainer.
A Division 7A loan is the documented version of a private company loaning money to its shareholder — done properly so the ATO doesn't treat the money as a disguised dividend. This page covers what Division 7A is, when it applies, the deemed-dividend trap if you get it wrong, the loan-vs-dividend choice, and where Esteb & Co fits (the borrowing side, not the tax side).
If a private company gives money to a shareholder (or someone related to them), the ATO assumes it's a disguised dividend unless you document it as a complying loan. A complying loan needs a written agreement, interest at or above the ATO benchmark rate, and minimum yearly repayments under section 109N. Mess up any of those and the ATO taxes the money as a deemed dividend — generally without the franking credit, so the shareholder pays full marginal-rate tax on what was meant to be a loan.
Run the numbers on your specific loan first
The Division 7A loan calculator implements the s109N formula against your loan amount, security choice, year of income and benchmark rate. Year-by-year amortisation table, deemed-dividend cliff math, and the secured-vs-unsecured trade-off in one output.
Run the Div 7A calculator → Download the agreement template →What Division 7A actually does
Division 7A of the Income Tax Assessment Act 1936 is Australia's anti-avoidance rule for disguised dividends. It exists because private companies historically loaned (or "loaned") money to their shareholders in lieu of paying dividends — letting shareholders extract company profits without triggering dividend tax. Division 7A closes that loophole by treating those payments as deemed dividends unless they're properly documented as loans.
The Division applies to three kinds of transaction between a private company and its shareholders (or their associates):
- Payments — direct cash transfers, transfers of property, use of company assets at less than commercial value.
- Loans — money advanced with an expectation of repayment, but without proper Division 7A documentation.
- Forgiven debts — debts owed by the shareholder to the company that the company writes off.
Of these, the loan side is by far the most common, because most private companies have at least one shareholder who's drawn money from the company at some point. The Division 7A loan structure exists specifically to give those drawings a compliant form — a written loan agreement, an ATO-benchmark interest rate, and a minimum yearly repayment schedule.
The three rules that make a loan compliant
A loan from a private company to a shareholder or associate qualifies as a Division 7A complying loan if it meets all three:
- Written agreement before the company's lodgement day. The loan must be documented in writing before the company's tax return for the year is due (or actually lodged, whichever is earlier). The agreement names the parties, the amount, the term, the security (or unsecured status), and the repayment schedule.
- Interest at or above the ATO benchmark rate. The benchmark is published annually by the ATO around May/June for the following year of income. Each year of the loan accrues at that year's published rate, not the rate that applied when the loan was taken out. The rate is the RBA Indicator Lending Rate for bank variable housing loans (Standard) as at May before the income year. The current FY26 rate is 8.27% — see the full benchmark rate explainer + history FY20–FY26.
- Minimum yearly repayments per s109N. Each test year the borrower must pay at least the minimum yearly repayment (MYR) — calculated as the amortisation of the start-of-year balance over the remaining term at that year's benchmark rate. Maximum term: 7 years unsecured, or 25 years secured by a registered mortgage over real property.
Miss any one of these and the loan becomes a deemed dividend. The documentation rule is where most loans fail — the company writes the agreement after the lodgement date, or never writes one at all. The rate rule trips up loans documented at a fixed rate when the ATO benchmark moves. The repayment rule is the recurring trap — every year the MYR must be met, every year, for the full term.
The deemed-dividend trap
If the loan doesn't comply, the loan amount (or the shortfall on a missed MYR) is treated as a deemed dividend under section 109D — assessable income to the shareholder in the year the loan was made (or the year the MYR was missed). Three things make this expensive:
What "deemed dividend" actually costs you
1. Generally unfrankable. Deemed dividends usually can't carry franking credits — there's no offset for company tax already paid. The shareholder pays full tax at their marginal rate on the deemed amount. On a $200,000 deemed dividend at the 47% top marginal rate that's $94,000 of tax payable on what was meant to be a loan.
2. No late-payment cure. If the MYR is missed by 30 June, the shortfall is locked in as a deemed dividend for that year. Paying late on 1 July doesn't fix it. The ATO has discretion under s109RB to ignore the breach in cases of honest mistake or inadvertent omission — but it's discretionary, it requires a written application, and it's not granted automatically.
3. Compounds across years. A loan that misses MYR in year 2 creates a deemed dividend in year 2 AND continues accruing under the original loan agreement. The shareholder gets taxed in year 2 on the shortfall, then still has to keep meeting MYR in years 3-7 to avoid further deemed dividends. The original loan doesn't disappear; the breach just adds a tax bill on top of it.
Loan vs dividend — when each one wins
Once the structural choice is on the table — the shareholder wants money out of the company — the two main legitimate paths are: take it as a Division 7A loan, or declare it as a dividend. The decision is genuinely strategic and depends on numbers your accountant runs. Rough framing:
| Scenario | Typically favours | Why |
|---|---|---|
| Shareholder on top marginal rate (47%), low company franking balance | Div 7A loan | Loan defers tax; dividend would face full marginal rate with little franking offset |
| Shareholder on 30% marginal rate or below, company has franking credits | Franked dividend | Company tax (30%) paid already; franking credit fully offsets shareholder tax — possible refund |
| Company cashflow strong, shareholder wants permanent extraction | Franked dividend | Loan eventually needs repayment; dividend doesn't. Cleaner if franking allows. |
| Company cashflow tight, shareholder wants temporary extraction | Div 7A loan | Repaid over 7 (or 25) years; doesn't drain company franking account |
| Shareholder wants to refinance against personal property | Div 7A loan → commercial refinance | Bank pays out the Div 7A; shareholder services bank loan at commercial rates instead. Frees the company. |
This decision is your accountant's call — the strategic comparison depends on the company's franking balance, retained earnings, the shareholder's marginal rate, what the funds will be used for, and other items that don't fit on this page. Our role starts after the structure is set — see the next section.
Secured (25y) vs unsecured (7y) — the cashflow trade-off
If the Div 7A loan path is chosen, the next sub-decision is the term. Section 109N(3) allows 7 years unsecured or 25 years if the loan is secured by a registered mortgage over real property. Same loan amount, same benchmark rate, very different cashflow:
| Path | Year-1 MYR ($500k loan, 8.27%) | Total interest paid | Trade-off |
|---|---|---|---|
| Unsecured · 7-year max | $96,924 | ~$178,000 | Higher annual cashflow burden; less cumulative interest |
| Secured · 25-year max | $47,924 | ~$698,000 | Roughly halves the annual MYR; ~4× cumulative interest |
The secured path requires registering a mortgage over real property — additional legal cost, additional documentation, the property can't be freely sold or refinanced during the term without discharging or porting the Div 7A mortgage. Most accountants default to unsecured unless the borrower's cashflow can't sustain the 7-year MYR; at that point the question is often whether the loan should exist at all.
Run the exact numbers for your specific loan amount and rate at the Division 7A loan calculator — both paths sit in the output for direct comparison.
The commercial refinance exit — where the broker fits
Many Div 7A arrangements eventually need refinancing. The shareholder's cashflow becomes tight; the company needs the cash back for operations; the family wants the lending consolidated in one place. The most common exit:
- Shareholder obtains a commercial loan from a bank, non-bank, or private lender — typically secured against the same property already mortgaged for the Div 7A loan (or another asset).
- Loan proceeds pay out the company's Div 7A loan in full. The Div 7A is discharged; the company is paid.
- Shareholder now services the commercial loan at commercial rates instead of the company at benchmark.
- Tax position cleans up — no more Div 7A compliance, no more MYR calculations each year, no more deemed-dividend risk on the company side.
This is the side of the file we work. Esteb & Co is an Connective-accredited mortgage broker — we route the file to the lender that will write the commercial refinance given the borrower's income shape, security profile, and the underlying loan amount. The relevant calculator-anchored brief is the self-employed service brief if the borrower is a business owner (which they almost always are, by definition, on a Div 7A file), or the investor brief if the security property is a rental.
Where to next
Three pieces sit alongside this explainer — calculator, agreement template, and the partnership brief for accountants running Div 7A refinances:
Run the calculator → Download the agreement template → Accountant partnership brief →FAQs
What is a Division 7A loan in plain English?
A loan from a private company to a shareholder (or someone related) documented properly enough that the ATO doesn't treat it as a disguised dividend. Needs a written agreement, interest at or above the ATO benchmark, and minimum yearly repayments per s109N.
When does Division 7A apply?
Whenever a private company makes a payment, loan, or forgives a debt to a shareholder or an associate of a shareholder. The trigger is the relationship, not the amount.
What is the deemed-dividend trap?
If the loan doesn't comply, the amount (or shortfall) is treated as a deemed dividend — assessable income to the shareholder, generally not frankable, so taxed at full marginal rate.
Loan or dividend — which is the right call?
Tax-strategy question. Generally Div 7A loan wins for top- marginal-rate shareholders with low company franking balance; franked dividend wins when shareholder marginal rate is low and franking credits are available. Your accountant runs the comparison.
What is the ATO benchmark rate?
Published annually around May/June for the following year of income. The RBA Indicator Lending Rate (bank variable housing — Standard) as at May before the income year. Each year-of-income worth of a loan accrues at that year's published rate.
Can a Div 7A loan be refinanced with a bank?
Yes — and that's the borrowing-side of the file where Esteb & Co works. Shareholder gets a commercial loan, pays out the Div 7A in full, services the bank loan at commercial rates instead.
Is Esteb & Co qualified to give Div 7A advice?
No. We're a mortgage broker (NCCP / Connective-accredited), not a registered tax agent. Div 7A advice belongs with your accountant. We work the borrowing-side of any property-backed refinance.