Division 7A for Residential Builders (Loans From Your Company)

What it is

Division 7A is an integrity rule in Part III of the Income Tax Assessment Act 1936. It stops shareholders of private companies (and their associates) from accessing company profits as tax free loans or payments.

If a private company pays money to a shareholder, lends money to them, or forgives a debt they owe, and the arrangement is not put on commercial terms, Division 7A treats the amount as a deemed unfranked dividend in the recipient's hands. That dividend is included in assessable income and no franking credit attaches to it. Unfranked dividends taxed at the top marginal rate cost a lot.

Why builders get caught

A common pattern: a builder runs trading through a company (BuildCo Pty Ltd), pays company tax on profits at 25%, and dips into the company bank account during the year for personal expenses (school fees, a holiday, a personal car). At year end the accountant says "that is a loan to the director".

If the loan is not on commercial terms (Division 7A complying terms) before the company's lodgment day for that income year, the whole loan is a deemed unfranked dividend. The director adds it to their personal assessable income at marginal rates.

What counts as a Division 7A loan

A Division 7A loan is broader than a written loan agreement. It includes:

• An advance of money
• A provision of credit or any other form of financial accommodation
• A payment for an obligation owed by another person
• A transaction equivalent to a loan in substance

So drawing $50,000 from the company account during the year, paying personal credit card bills from the company account, or having the company pay private school fees on your behalf all count. So does a debit balance on a shareholder loan account.

How to avoid the deemed dividend

There are three main paths to keep a loan out of Division 7A:

Repay the loan before lodgment day

If the shareholder repays the full amount before the company's lodgment day (the earlier of the due date or actual date of lodgment of the company's return), Division 7A does not apply. The trap is that the ATO disregards repayments that are funded by a new loan from the same company.

Put the loan on complying terms

You can document the loan with a written agreement that meets minimum standards:

• Maximum term of 7 years for an unsecured loan, or 25 years for a loan secured by a registered mortgage over real property where the loan to value ratio is below 110%
• Minimum interest rate at least equal to the Division 7A benchmark interest rate set each year by the ATO
• Minimum yearly repayments calculated under the formula in section 109E of the ITAA 1936

The benchmark interest rate is the RBA's "Indicator Lending Rates Bank variable housing loans interest rate" for owner occupiers, last published before the start of the income year.

Declare a franked dividend

The company can declare a fully franked dividend equal to the loan and apply the dividend against the loan balance. The shareholder includes the grossed up dividend in income but receives a franking credit for the company tax already paid.

UPEs and Division 7A

An unpaid present entitlement (UPE) is money a trust has resolved to distribute to a beneficiary but has not paid. If the beneficiary is a private company and the UPE remains unpaid, Division 7A can apply.

This area has shifted significantly. The Bendel case (Federal Court 2023 and Full Federal Court 2025) found that an unpaid present entitlement to a private company is not itself a Division 7A loan, contradicting the ATO's long held position in TR 2010/3 and TD 2022/11. The ATO has indicated it will continue to apply its existing view pending legislative response or further appeal. Builders running bucket company structures with UPEs from a trust should get current advice.

Practical example

BuildCo Pty Ltd has a 30 June 2026 year end. During the 2025-26 year, the director drew $80,000 from the company account for personal use. The company's lodgment day is 15 January 2027. Three options:

1. Director deposits $80,000 back into the company by 14 January 2027 (genuine repayment, not from a new BuildCo loan)
2. Director signs a written 7 year unsecured loan agreement at the benchmark interest rate with minimum yearly repayments calculated under section 109E
3. Company declares an $80,000 fully franked dividend before 15 January 2027 and offsets it against the loan

If none of these happen, $80,000 is a deemed unfranked dividend in the director's 2025-26 return.

Records

Keep loan agreements, board minutes for dividends, repayment evidence and franking account records. The ATO has a Division 7A calculator that works through complying loan repayments year by year.

When to get advice

Division 7A is one of the most litigated parts of the tax law. Trust to company UPEs, three party arrangements through interposed entities and family law settlements all add complexity. A registered tax agent who knows builder structures is worth their fee here.