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15 min 39 sec
0:00
Opening
0:31
Company money isn't your money
1:15
Background: before 1997
2:29
Background: three decades of patches
3:52
What Division 7A catches
4:29
The deemed dividend, and why it hurts
5:07
The way out: repay, or a complying loan, before lodgment day
6:19
Minimum yearly repayments
7:03
Saltbush, year one: 2025–26
7:48
Year two: 2026–27, the first repayment, and a second loan
8:50
Year three: 2027–28, two loans and a shortfall
10:09
To the end of the loans
10:49
Salary, dividend or loan: $10,000 three ways
12:05
Why owners use it: the benefits
12:45
The drawbacks
14:00
On the return, and in Beeswax
14:53
Summary
The Company Tax Return, Explained
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Deep dives
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Episode 8
Division 7A: loans from your company
Why the rules exist, what they catch and how a complying loan works, followed over four years for Saltbush. Then a loan against salary and dividends, with the benefits and the drawbacks.
Division 7A
director loans
deemed dividend
minimum yearly repayment
benchmark interest rate
Transcript
0:00
Your company has made a profit. The money sits in the company's bank account and you can see it, but it isn't yours. This film covers what happens when an owner takes that money out other than as salary or a dividend, under the rules in Division 7A of the 1936 Tax Act.
0:17
It covers why the rules exist, how they work, and how a loan from a company runs over several years. Then it weighs a loan against salary and dividends. It's general information, not tax advice.
0:31
A company is a separate taxpayer. Saltbush pays company tax at 25 per cent as a base rate entity. Its director pays tax at her own rates, up to 45 per cent plus the 2 per cent Medicare levy.
0:45
Profit reaches her in one of three ways: salary, which the company deducts and she pays tax on at her marginal rate; a dividend, paid from taxed profit, with franking credits for the company tax already paid; or she takes the money and owes it back.
1:01
The third pipe, money taken out any other way, is the one Division 7A watches. Before it existed, a loan could leave the company, never come back, and often never be taxed as the shareholder's income.
1:15
Before Division 7A, section 108 of the 1936 Act covered this ground. A private company's loan or payment to a shareholder was a dividend only if the Commissioner formed the opinion that it was a distribution of profits.
1:30
That usually took an audit. In the government's own words at the time, many loans that should have been taxed as dividends weren't. The 1997–98 Budget, on 13 May 1997, announced that section 108 would be strengthened.
1:46
The new rules were introduced to Parliament on 4 December 1997 and became law in June 1998 as Division 7A. They apply automatically: no opinion is needed. They cover loans and payments made from 4 December 1997.
2:02
That's why the return's loans label still asks whether loans were made before or after that date. Background: in 1997–98 the company rate was 36 per cent and the top personal rate 47.
2:16
The Board of Taxation later put it this way: the wider the gap between the company rate and personal rates, the stronger the pull to keep profits in a company rather than pay them out as dividends.
2:28
Since then the rules have been patched more than rewritten. From December 2002, Subdivision EA covers a trust that owes a company an unpaid distribution and pays or lends money to the company's shareholders or their associates.
2:43
In 2007, the Commissioner got a discretion to disregard a deemed dividend that came from an honest mistake or an inadvertent omission, or to allow it to be franked.
2:53
From 1 July 2009, letting a shareholder use a company asset, such as a holiday house or a boat, counts as a payment. Also from 2009, the ATO took the view that a trust distribution owed to a company and left unpaid could be a loan.
3:10
The Board of Taxation reviewed the whole division and reported in November 2014. The 2016 Budget announced simpler rules, and a 2018 consultation proposed a single 10-year loan with a new interest rate.
3:23
The start date was deferred, then tied to legislation that has never been introduced. As at November 2026, those changes aren't law. In June 2026, in the Bendel case, the High Court decided five to two that a company's unpaid entitlement from a trust is not, on its own, a loan for Division 7A.
3:44
The ATO is reviewing its guidance. Other rules, including Subdivision EA, can still apply. Division 7A applies to a private company that gives value to a shareholder, or to an associate of a shareholder, such as a relative or a related trust.
4:02
It can also reach a former shareholder, if the benefit is because of who they were. There are four kinds: payments, including the director's "drawings"; loans, including any credit or financial accommodation; debts the company forgives; and the use of a company asset.
4:20
It doesn't catch what's already assessable in the person's hands: salary, directors' fees and dividends that are properly declared. If nothing is done in time, Division 7A treats the amount as a dividend paid to the shareholder at the end of the company's income year.
4:37
It's expensive because it's unfranked: the shareholder pays tax on all of it at their marginal rate; none of the company tax already paid on that profit reaches her as a credit.
4:48
The company's credits wait in its franking account for a later franked dividend. The deemed dividend can't be more than the company's distributable surplus: broadly, its net assets less its paid-up share capital, with some adjustments.
5:01
A company with no surplus has no deemed dividend. There's no deemed dividend if, before the company's lodgment day, the amount is either: repaid; or put on a complying loan agreement.
5:15
A payment such as drawings can be converted into a loan for this. The lodgment day is the earlier of the return's due date and the day it's actually lodged. Saltbush lodges through a tax agent, so its due date is 15 May 2027.
5:30
That's a Saturday, so the return can go in on Monday 17 May, but it's safest to have the loan dealt with before the 15th. A complying agreement: is in writing before the lodgment day; charges interest at least at the benchmark interest rate for each year after the year the loan is made.
5:49
That's 8.77 per cent for 2026–27; runs for no more than 7 years, or 25 years if the whole loan is secured by a registered mortgage over real property worth at least 110 per cent of it, after any debts that rank ahead.
6:05
A repayment doesn't count if, when it's made, the shareholder intends to borrow a similar amount or more back, or borrowed from the company to make it. Offsetting a dividend or salary always counts.
6:19
A complying loan has to be paid down each year with a minimum yearly repayment. It works like a home loan. Each year's figure comes from: the balance at the start of the year; that year's benchmark rate; the years left on the term.
6:34
The rate changes each year, so the repayment is worked out again each year. Nothing is due in the year the loan is made. From the next year on, the repayment must be made by the end of the company's income year, 30 June.
6:47
If the director pays less, the shortfall becomes an unfranked dividend for that year. It's the shortfall that's taxed, not the whole balance. The ATO's Division 7A calculator and decision tool works out each year's figure.
7:03
Here's how this runs for Saltbush over several years. The first year is the course's example. The years after it are an illustration. In March 2026 the director takes 6,000 dollars from the company account for personal costs.
7:17
It's booked as drawings. At 30 June it hasn't been repaid. At year end the bookkeeper moves it to a "Loan to director" account. In April 2027, before the lodgment day, the director signs a written 7-year loan agreement at the benchmark rate.
7:35
So: there's no deemed dividend; no interest is required for 2025–26; the return shows 6,000 dollars at loans to shareholders, label N, code A. The benchmark rate for 2026–27 is 8.77 per cent.
7:52
On the 6,000 dollar loan: interest is 526 dollars 20, which is income to Saltbush, taxed at 25 per cent; the minimum yearly repayment is 1,182 dollars 96, due by 30 June 2027.
8:08
She repays it by setting it off against a franked dividend. Saltbush declares the dividend in June, and before 30 June she and the company agree to offset it against the loan.
8:19
Saltbush puts that in writing, which is good practice. It counts as a repayment as long as the dividend is actually owed to her when the offset is made. A journal entry alone isn't enough, and she's still taxed on the dividend.
8:32
In the same year she draws another 60,000 dollars for a house deposit. That's a second, separate loan, needing a complying agreement in place before that year's lodgment day, with its own 7-year term.
8:44
Its first repayment isn't due until 2027–28. Now both loans need repaying. Assuming the rate stays at 8.77 per cent, the yearly repayments are 1,182 dollars 96 and 11,829 dollars 58: 13,012 dollars 54 by 30 June 2028.
9:09
The company's interest income is about 5,700 dollars. If she covers it with a fully franked dividend, the dividend carries franking credits of about 4,300 dollars.
9:20
At her 47 per cent rate she still owes about 3,800 dollars of top-up tax, and pays that from her own pocket. Suppose she pays only 8,000 dollars. The shortfall of 5,012 dollars 54 becomes an unfranked deemed dividend for twenty twenty-seven twenty-eight.
9:38
At 47 per cent that's about 2,356 dollars of tax, with no credit for the company tax already paid on the profit behind it. And she still owes the 5,012 dollars 54: the loans still have to be repaid.
9:54
The Commissioner can let it go if the shortfall was beyond her control, or disregard it or allow it to be franked if it was an honest mistake or an inadvertent omission and is put right.
10:05
Both are discretions, not rights. If the rate stays at 8.77 per cent and every repayment is on time: the first loan is paid off by 30 June 2033. That's 8,280 dollars 70 repaid, of which 2,280 dollars 70 is interest; the second loan is paid off a year later.
10:28
That's 82,807 dollars 7, of which 22,807 dollars 7 is interest. Each year's real rate is set before that year starts, so the real figures will differ. Loans like this are usually repaid from dividends or salary, and those are taxed to the director in the normal way.
10:49
Take 10,000 dollars of Saltbush's profit, and a director paying 47 per cent. As salary, the company deducts it, so there's no company tax. She pays 4,700 dollars and keeps 5,300.
11:03
That's before super. Salary also costs the company 12 per cent super guarantee on top, so the same 10,000 dollars would buy about 8,930 of salary and 1,070 of super.
11:17
And a salary has to be reasonable for the work done. As a franked dividend, the company pays 2,500 dollars of tax and she receives 7,500 dollars with 2,500 dollars of credits.
11:30
Her top-up is 2,200 dollars and she keeps 5,300. That's the same 4,700 dollars of tax in total. As a loan, the company pays its 2,500 dollars and lends her 7,500 dollars.
11:46
She has more cash now and no top-up tax yet. But she owes all 7,500 dollars, with interest. And the dividends or salary that usually repay it are taxed when they're paid.
11:58
So a loan doesn't remove tax. It moves when the personal tax is paid. Owners use complying loans because: Cash now. Profit taxed at 25 per cent can be used today, without the personal tax a dividend or salary would bring this year.
12:16
Timing. Repayments can come from dividends spread over up to seven years. A dividend in a year when the director's other income is low carries less top-up tax. A clear, legal path.
12:28
A written agreement, the benchmark rate and on-time repayments keep the amount out of the deemed dividend rules. No payroll obligations on the loan itself. Unlike salary, a loan doesn't trigger super guarantee or pay as you go withholding.
12:44
The drawbacks are just as real: It's mostly deferral. Repayments come from money that's already been taxed, or will be. Interest is a real cost. At 8.77 per cent, it's usually not deductible to the director when the money is used for private things, such as a home.
13:02
So she pays it from taxed income, and the company is taxed on it again. The repayment is due every year. Each 30 June needs real cash or a properly documented set-off.
13:14
Loans taken in later years stack up. Mistakes are expensive. A late agreement, a missed repayment, or money that's borrowed back means an unfranked dividend. Relief depends on the Commissioner's discretion.
13:28
It's a debt to the company. If the company fails, a liquidator can demand the money and sue for it. It doesn't fix other rules. If the company's income is really payment for the director's own personal skills or effort, the personal services income rules can tax it as hers anyway, unless the company is a personal services business.
13:48
No super. Unlike salary, a loan builds nothing towards retirement. Uncertainty. Changes have been promised since 2016 and could still come. On the company's return: the year-end balance of loans to shareholders and associates goes at item 8, label N, with code A for loans made from 4 December 1997; a deemed dividend is reported as an unfranked dividend paid, at item 8, label K; interest on the loans is the company's income, in gross interest at item 6, label F.
14:23
In Beeswax: the Year-end review checks accounts named for a director, shareholder, associate or related party. Any balance owed to the company at 30 June turns the check red until a person records whether it was repaid before lodgment or is under a written Division 7A loan agreement.
14:42
With the agreement's year and term recorded, it also works out the year's minimum repayment and flags a shortfall. It doesn't check that the agreement itself complies.
14:53
Company money isn't the owner's money until it's paid to them properly, such as salary or a dividend. Division 7A has applied since 4 December 1997. Payments, loans, forgiven debts and the use of assets become unfranked dividends unless they're dealt with.
15:10
Before the lodgment day: repay it, or sign a complying agreement (written, at the benchmark rate, 7 years at most, or 25 with a registered mortgage). Then make a minimum yearly repayment by every 30 June.
15:25
A shortfall is taxed. A loan delays personal tax but doesn't remove it, and the interest is a real cost. Get advice before relying on it: this film is general information, not tax advice.