Division 7A Loan Calculator

What is a Division 7A loan?

Division 7A of the Income Tax Assessment Act 1936 stops private company profits being taken out tax-free. If a private company lends money to a shareholder or an associate of a shareholder - which includes family members, family trusts and related entities - and that amount is not repaid or put on a complying loan agreement by the company's lodgment day, the whole amount is treated as an unfranked dividend paid to the borrower. Unfranked means there is no franking credit attached, so the borrower pays tax on the full amount at their marginal rate.

A complying loan avoids that outcome. The loan must be in writing, charge interest at least equal to the ATO benchmark interest rate for each income year, run for no more than 7 years (or 25 years where it is secured by a registered mortgage over real property), and have a minimum yearly repayment made every year until it is paid out. Miss the minimum in any year and only the shortfall - not the whole loan - is treated as a deemed dividend.

Div 7A benchmark interest rates by year

The ATO sets the benchmark rate each July and it applies for the full income year.

How the minimum yearly repayment is calculated

The minimum yearly repayment is worked out with a standard amortisation formula:

MYR = balance x r / (1 - (1 + r)^-n)

Balance is the amount of the loan not repaid at the end of the previous income year, r is that income year's benchmark interest rate, and n is the number of years left in the term. Because r is reset annually and n falls by one each year, the minimum has to be recalculated every single year - it is not a fixed instalment.

Worked example. A company lends a shareholder $100,000 in the 2024-25 income year on an unsecured 7-year complying loan. No repayments are made before lodgment day, so the first minimum yearly repayment falls in 2025-26 at the 2025-26 benchmark rate of 8.37% with 7 years remaining: $100,000 x 0.0837 / (1 - 1.0837^-7) = about $19,455. Of that, $8,370 is interest and about $11,085 reduces the principal, leaving roughly $88,915 owing. The 2026-27 minimum is then recalculated on that reduced balance at the new rate with 6 years to run.

What happens if I miss a minimum repayment?

The shortfall between the minimum yearly repayment and what was actually paid is treated as an unfranked deemed dividend, assessable to the borrower in the income year the shortfall happened. There is no franking credit, so a shortfall of $5,000 for someone on the 37% marginal rate costs roughly $1,850 in extra tax, and it is capped by the company's distributable surplus. The loan itself continues - you still owe the balance, and the minimum for the following year is calculated as though the missed amount is still outstanding.

Section 109RB gives the Commissioner a discretion to disregard the deemed dividend, or to allow it to be franked, where the shortfall arose from an honest mistake or an inadvertent omission. That relief is not automatic - it needs a written application setting out what happened, what has been done to fix it, and your compliance history. The practical rule is simple: pay the minimum by 30 June every year, keep the written agreement on file, and if a year has already been missed, get advice before the return is lodged.

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This calculator provides general information only and is not tax advice. Division 7A is complex - confirm your position with a registered tax agent.