Division 7A in 2026–27: company money in a shareholder's hands

Why company money is treated differently

A private company pays its own tax on its profit. The owners pay theirs when that profit reaches them as wages, director's fees or dividends. Division 7A of the Income Tax Assessment Act 1936 deals with the third route: money that leaves the company for a shareholder's benefit without being taxed as either.

If the company lends money to a shareholder or an associate, pays an amount to them or for them, or forgives a debt they owe, the law can treat the amount as a dividend paid at the end of the company's income year. It is unfranked, so no credit comes with it for the company tax already paid, and it goes into the recipient's assessable income. The deemed dividend is capped at the company's distributable surplus for the year.

What counts as a loan, a payment or a forgiven debt

Loan means more here than it does at the bank. It covers an advance of money, credit or any other financial accommodation, a payment made for someone who is obliged to pay it back, and any transaction that in substance is a loan (ATO: loans by private companies). The common one in small companies is the director's loan account that drifts into debit as school fees and the family holiday go through the business card.

A payment includes a transfer of property. Since 1 July 2009 it also includes letting a shareholder or associate use a company asset, such as a holiday house or a boat, when it is available to them to the exclusion of the company. Payments made to someone in their capacity as an employee are outside Division 7A (ATO: payments by private companies).

Writing off a debt a shareholder or associate owes the company can be a dividend too (ATO: debt forgiveness by private companies). Associates include relatives, partners and the trustee of a trust under which the shareholder or another associate benefits (ITAA 1936 section 318), so a loan from the company to the family trust is caught in the same way as a loan to the shareholder personally.

Some amounts are excluded, including a loan to another company that is not acting as a trustee, and a loan made in the ordinary course of the company's business on the terms it gives arm's length borrowers.

The deadline is the company's lodgment day

Nothing is deemed the day the money leaves. The test is applied at the company's lodgment day for the year the loan was made, which is the earlier of the due date for its tax return and the date it is actually lodged. By then the amount has to be repaid in full or put under a written loan agreement that meets the complying loan rules in section 109N.

Lodging the company return early brings the deadline forward. An agreement signed after the return has gone in is too late, even if the due date is still months away.

Repayments have to be real. The ATO does not count a backdated journal entry, a set-off where the two parties do not actually owe each other, or a repayment funded by borrowing a similar or larger amount back from the company.

What a complying loan agreement needs

There is no prescribed form. The ATO expects the agreement to identify the parties, set out the amount, the term, the requirement to repay and the interest rate, and be signed and dated by both sides.

The interest rate for each year must be at least that year's benchmark rate. The term can be no longer than 7 years for an unsecured loan. A 25-year term is allowed only where the whole loan is secured by a registered mortgage over real property and, when the loan is made, the property's market value, less any debts secured ahead of the loan, is at least 110% of the loan amount.

Several loans to the same person in one year with the same maximum term are combined into one amalgamated loan. A company that has lent to the same shareholder over several years can end up with several amalgamated loans, each with its own repayment schedule that cannot be pooled with the others.

The benchmark interest rate for 2026–27

For companies with a 30 June year end, the benchmark rate for the year ending 30 June 2027 is 8.77%. It is the Reserve Bank's standard variable owner-occupier housing loan rate last published before the year began, in this case on 5 June 2026. The rate was 8.37% for 2025–26 and 8.77% for 2024–25 (ATO: Division 7A benchmark interest rate). The same figure is on our tax and super facts page.

Minimum yearly repayments

No interest or repayment is required in the year the loan is made. From the following year, the borrower must repay at least the minimum yearly repayment by the end of each income year, 30 June for most companies. It is worked out from three inputs: the balance not repaid at the end of the previous year, that year's benchmark rate and the remaining term.

Because the benchmark is reset every July, the repayment changes each year even when nothing else does. The ATO's Division 7A calculator splits each year's figure into interest and principal.

When a repayment is missed

If the repayments made during the year fall short of the minimum, the shortfall is treated as an unfranked dividend for that year, again capped at the distributable surplus. The loan does not go away. The borrower still owes the company the money, and the ATO's view is that the principal part of a shortfall does not reduce the balance used to work out the next year's repayment (ATO ID 2013/36). A missed year makes the following years heavier.

The Commissioner can disregard a deemed dividend, or allow it to be franked, under section 109RB. The breach has to come from an honest mistake or an inadvertent omission. The ATO looks at how it happened, how quickly it was corrected and whether Division 7A has caught the same people before. Relief usually comes with conditions, typically a complying agreement and catch-up repayments with interest. There is no form; the application is normally made in writing (ATO: the Commissioner's discretion under section 109RB).

The cheaper course is to know the year's repayment by the end of the March quarter, decide how it will be funded and move real money before 30 June.

Unpaid present entitlements after the Bendel decision

A family trust often distributes income to a company beneficiary but keeps the cash. The company's right to that money is an unpaid present entitlement, or UPE. For entitlements arising from 1 July 2022, the ATO's published view in TD 2022/11 was that a UPE left unpaid could become a loan by the company to the trust (ATO: trust entitlements).

On 10 June 2026 the High Court decided Commissioner of Taxation v Bendel [2026] HCA 18. The majority held that a company which simply does nothing about its entitlement has not made a loan under section 109D. In its decision impact statement of 26 June 2026, the ATO said it will withdraw TD 2022/11 and will not treat a UPE as a loan where the company has taken no relevant action (ATO: decision impact statement, Bendel).

Some UPEs are still caught. Those put under complying loan terms are loans and stay loans. Subdivision EA of Division 7A may still treat payments, loans or forgiven debts from the trust to the company's shareholders or their associates as dividends while the UPE exists. Section 100A can apply where the arrangement is meant to reduce one person's tax while someone else benefits, outside ordinary family or commercial dealing. The trust deed, the trustee's resolutions and the accounts now decide whether either provision reaches your group, and the ATO is still reviewing its guidance. If your group carries UPEs, get advice before deciding whether to pay them, leave them or convert them.