Division 7A Loans: What Business Owners Must Get Right in 2025-26

Updated 26 July 2026

What triggers Division 7A

Any of the following from a private company to a shareholder or an associate (spouse, family member, family trust, related entity):

• Loans, formal or informal, including a running loan account that drifts into debit
• Payments the company makes for private expenses: school fees, mortgage, credit cards, the car
• Debts forgiven
• Use of company assets: the boat, the beach house, the vehicle, even if merely available
• Trust distributions to the company that are never paid (unpaid present entitlements), which the ATO treats as financial accommodation for entitlements arising from 1 July 2022 onward

The most common real-world trigger is none of these deliberately. It is a director drawing living costs against the loan account all year and discovering the balance at tax time.

Your three exits before lodgment day

Once the loan exists at 30 June, you have until the earlier of the company's lodgment day or due date for that year's return to do one of three things:

1. Repay it in full. Genuine repayment; a repay-and-redraw a week later is disregarded.
2. Declare a dividend to soak it up, franked to the extent credits are available.
3. Put a complying loan agreement in place. This is the standard fix, and the rest of this guide.

The complying loan agreement

Three requirements:

Minimum yearly repayments

From the year after the loan is made, a minimum yearly repayment of principal and interest must be paid by 30 June each year. Not by lodgment; by 30 June.

The formula amortises the balance over the remaining term at the current year's benchmark rate.

• Remaining term: 7 years
• Minimum yearly repayment for 2025-26: approximately $38,900 (7-year amortisation at 8.37%; verify the exact figure with the ATO's Division 7A calculator before relying on it)
• Of that, $16,740 is interest (assessable to the company) and the balance reduces principal

Because the rate dropped from 8.77% to 8.37%, minimum repayments on existing loans fell slightly this year; recalculate rather than repeating last year's figure. They will rise again for 2026-27 at 8.77%.

Shortfalls. Pay less than the MYR and the shortfall (not the whole loan) is a deemed dividend for that year, unless the Commissioner exercises discretion under s109RB for honest mistake. A common rescue is declaring a dividend that is set off against the repayment obligation; the paperwork order matters, so do not improvise it.

Amalgamated loans

Multiple loans made to the same shareholder in one year on the same terms are treated as a single amalgamated loan from the following year. One agreement, one MYR calculation, one balance to track. It simplifies the arithmetic, but it also means one missed repayment infects the whole amalgamated balance, not just the newest drawing.

Unpaid present entitlements after Bendel

For sixteen years the ATO treated a trust's unpaid distribution to a bucket company as a Division 7A loan. On 10 June 2026 the High Court ended that position: in Commissioner of Taxation v Bendel [2026] HCA 18 a 5-2 majority held that a UPE is not, of itself, a loan for Division 7A purposes.

What that means in practice right now:

• New UPEs are not automatically Division 7A loans. The company's failure to call for payment is not "financial accommodation" caught by s109D.
• It is not a free pass. Section 100A reimbursement agreements and Subdivision EA still police arrangements where trust funds flow around a corporate beneficiary, and the ATO has other tools where the mischief is real.
• Do not unwind existing complying loan agreements yet. Thousands of groups put loan agreements in place relying on the ATO's former view. The ATO's Decision Impact Statement, which will set out how it treats those historical arrangements and the status of TD 2022/11, is still pending. Some groups may have overstated historical Division 7A exposure and have amendment opportunities; that is a case-by-case review, not a bulk assumption.
• Reform is likely. The 2026-27 Budget also proposed a 30% minimum tax on discretionary trust income from 1 July 2028, so the economics of retaining profits via bucket companies are moving regardless.

If your group runs a bucket company, this is the item to review before anything else; our family trust structuring guide covers how the trust-and-bucket-company arrangement should be run.

Two technical limits worth knowing

Distributable surplus. A deemed dividend is capped at the company's distributable surplus, broadly its net assets less paid-up capital under the statutory formula. A company with little retained wealth cannot be deemed to have paid a large dividend. This cap rescues some legacy messes, but it is measured at year end under a formula with its own adjustments; do not assume it saves you without calculating it.

Interposed entities. Routing money through a middle entity does not work. Company lends to the family trust, trust lends to you: Division 7A traces through and deems the loan made by the company to you directly. The same tracing applies through chains of companies and trusts, and to guarantees the company gives over a shareholder's borrowing. The provisions were drafted for exactly these workarounds.

Getting caught: what it costs

A deemed dividend is unfranked and assessable at the shareholder's marginal rate, up to 47% including Medicare levy, with no corresponding deduction and, since the company's tax was already paid on those profits, effective double taxation. The ATO has named Division 7A a compliance priority for private groups repeatedly, and loan accounts are the first thing reviewed in any private group review or audit. The fix costs a document and a repayment schedule; the failure costs the top marginal rate.

This article provides general information only, current at the date of publication, and does not constitute personal tax, legal or financial advice. Consider your circumstances or speak with us before acting. Liability limited by a scheme approved under Professional Standards Legislation.