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The problem Division 7A solves
A company pays 25-30% tax; you pay up to 47%. Without Division 7A, an owner could leave profits in the company at the company rate and simply transfer the cash out, extraction without the top-up tax that salary or dividends would trigger. Division 7A closes the gap: informal extraction is taxed as if it were the worst kind of dividend, an unfranked one.
What triggers it
| Trigger | Everyday version |
|---|---|
| Payments to a shareholder or associate | The company pays your personal credit card, school fees or renovations |
| Loans not on complying terms | "I'll transfer $80k from the company account and sort it out later" |
| Debt forgiveness | The company stops chasing money you owed it |
| Use of company assets | The company boat or holiday house used privately, which is a payment by another name |
| Unpaid trust entitlements | A trust distributes to a company on paper and the cash never moves. Contested territory, see the UPE guide |
"Associate" is wide: spouse, children, related trusts and related companies. Routing the money to your partner changes nothing.
The deemed dividend, and what it costs
The amount is assessed to you as an unfranked dividend in the year it happened: no franking credits, full marginal rates. A director on $150,000 who draws $100,000 informally faces roughly $47,000 of tax on money the company already paid 25-30% on, which is the double-tax outcome the whole regime is engineered to threaten.
The three exits, in order of preference
How to fix a Division 7A exposure
Repay before the company's lodgment day
Money back in the company before the earlier of the due date or actual lodgment of that year's return means no Division 7A event. Repaying and immediately redrawing is specifically ignored by the anti-avoidance rules.
Put it on a complying loan agreement
By the same deadline: written agreement, benchmark interest rate, maximum 7-year term (25 years if secured by a registered mortgage over real property), and minimum yearly repayments thereafter. This converts the problem into a manageable schedule and is the standard fix.
Declare it as an actual dividend or salary
Sometimes biting the bullet with a franked dividend using the franking account costs less than servicing a 7-year loan, especially at lower personal incomes. Run both numbers before you choose.
Frequently asked questions
What is Division 7A in simple terms?
Can I borrow money from my own company?
What is the deadline to fix a Division 7A problem?
Does Division 7A apply to family members?
What if the ATO finds an old undocumented loan account?
General information only - not personal tax, financial or legal advice. Consider your own circumstances or speak to a registered tax agent. Remission of penalties or interest and payment plans are decisions of the ATO and outcomes can't be guaranteed.