Division 7A: a practical guide for accountants

Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) stops private company profits reaching shareholders and their associates tax-free through loans, payments or forgiven debts. If it applies, the company is taken to pay an unfranked dividend to the shareholder or associate at the end of its income year. This guide sets out how the rules work, the numbers that matter for 2025-26 and 2026-27, and how to work out a minimum yearly repayment by hand.

What Division 7A catches

There are three main triggers. Each one turns an amount into a deemed dividend at the end of the private company's income year, capped at the company's distributable surplus.

Trigger	Section	What happens
Payment to a shareholder or associate	s 109C	The amount paid is a deemed dividend. "Payment" includes a payment on behalf of or for the benefit of the entity, a credit of an amount, and a transfer of property (valued at arm's length less any consideration). Section 109CA extends it to providing the use of an asset.
Loan to a shareholder or associate	s 109D	The part of the loan not repaid before the company's lodgment day for the year is a deemed dividend, unless the loan meets s 109N or another exclusion.
Debt forgiven	s 109F	The amount forgiven is a deemed dividend.
Minimum yearly repayment missed on a complying loan	s 109E	The shortfall for that year is a deemed dividend.

Each trigger applies if the entity is a shareholder or an associate of a shareholder at the time, or if a reasonable person would conclude the payment, loan or forgiveness happened because the entity has been a shareholder or associate at some time. Subdivision E extends the rules to amounts routed through an interposed entity.

What counts as a loan

Section 109D(3) defines loan widely. It includes an advance of money, a provision of credit or any other form of financial accommodation, a payment for or on behalf of an entity where there is an express or implied obligation to repay, and any transaction that in substance effects a loan of money. Under s 109D(4A), a payment converted to a loan before the end of the lodgment day is treated as a loan made when the payment was made. The ATO gives the example of a company paying for a shareholder's petrol during the year and converting those payments to a loan before lodgment day.

Main exclusions

• Loans and payments to other companies (s 109K). This does not cover a company acting as trustee.
• Amounts already assessable (s 109L), such as salary or wages properly included in the recipient's assessable income.
• Ordinary course of business on arm's length terms (s 109M), where the company makes similar loans to outsiders on the same usual terms.
• Complying loans (s 109N), covered in detail below.
• Liquidator's distributions and loans (s 109NA), although a liquidator's loan not repaid by the end of the following year becomes a dividend under s 109D(1A).

The lodgment day

Most Division 7A deadlines run to the lodgment day. Under s 109D(6), the lodgment day for a private company's income year is the earlier of:

1. the due date for lodging the company's tax return for that year, and
2. the date the company actually lodges that return.

Lodging the company return early brings the lodgment day forward. A loan agreement that was going to be signed later, or a repayment that was planned for the following month, then misses the deadline. For a 2025-26 loan, the agreement and any repayments meant to reduce the loan need to be in place before the 2025-26 company return is lodged or falls due, whichever comes first.

Complying loan agreements under s 109N

A loan made in an income year is not treated as a dividend under s 109D if, before the lodgment day for that year, all three of these are true:

The ATO says the written agreement should identify the parties, set out the amount and term of the loan, the requirement to repay and the interest rate, and be signed and dated. No interest is payable under Division 7A for the year the loan is made.

Maximum term: 7 or 25 years

Loan type	Maximum term	Conditions (s 109N(3))
Secured	25 years	100% of the value of the loan is secured by a mortgage over real property registered under a law of a State or Territory, and when the loan is first made the market value of the property, less any liabilities secured over it in priority to the loan, is at least 110% of the loan amount.
Any other loan	7 years	No security requirement.

A 25-year loan needs a registered mortgage. Security over shares, a personal guarantee or an unregistered mortgage does not meet the test, so those loans are capped at 7 years.

Refinancing between 7 and 25 year loans

Two rules stop the term being reset by refinancing.

• 7 to 25 years (s 109N(3A) and (3B)). If a 7-year loan is refinanced into a 25-year secured loan, the 25-year maximum is reduced by the time the old loan had run.
• 25 to 7 years (s 109N(3C) and (3D)). If a 25-year loan becomes a 7-year loan after it has run more than 18 years, the 7-year maximum is reduced by the excess over 18 years. The ATO's example is a secured loan that becomes unsecured after 20 years: the new maximum term is 5 years.

Section 109E(3A) and (3B) also deal with a constituent loan in an existing 7-year amalgamated loan that later becomes secured by a mortgage and has its term extended. That loan is split out and treated as a new amalgamated loan made just before the start of the later year.

The benchmark interest rate

Under s 109N(2), the benchmark interest rate for an income year is the Indicator Lending Rates, Bank variable housing loans interest rate last published by the Reserve Bank of Australia before the start of the year. The ATO publishes the rate for companies with a 30 June year end.

Income year	Benchmark rate	RBA rate published
2026-27 (year ending 30 June 2027)	8.77%	5 June 2026
2025-26 (year ending 30 June 2026)	8.37%	6 June 2025
2024-25 (year ending 30 June 2025)	8.77%	7 June 2024
2023-24 (year ending 30 June 2024)	8.27%	7 June 2023
2022-23 (year ending 30 June 2023)	4.77%	2 June 2022
2021-22 (year ending 30 June 2022)	4.52%	2 June 2021

Source: ATO benchmark interest rate page, last updated 1 July 2026. A company with a substituted accounting period works out its own rate: the ATO says it is the Housing loans; Banks; Variable; Standard; Owner-occupier rate last published by the RBA before the period starts.

The rate is what the loan agreement must charge at a minimum. The ATO also uses it to work out how much of a payment is interest and how much reduces principal (s 109E(7)), regardless of the rate in the agreement.

Minimum yearly repayments

From the year after the loan is made, each complying loan needs a minimum yearly repayment (MYR) paid during the company's income year. If the amount paid during the year falls short, the shortfall is a deemed dividend at year end under s 109E, subject to distributable surplus.

The formula

The ATO expresses the s 109E(6) formula as:

MYR = (P × I) ÷ (1 − (1 ÷ (1 + I))^T)

• P is the amount of the loan not repaid by the end of the previous income year.
• I is the benchmark interest rate for the year the MYR is being worked out.
• T is the remaining term: the loan's term less the number of years between the end of the year the loan was made and the end of the year before the current year, rounded up to the next whole number.

The ATO works it in five steps: multiply P by I; divide 1 by (1 + I); raise that to the power of T; subtract the result from 1; divide the step 1 figure by the step 4 figure.

The first year after the loan is made

The ATO says payments made before lodgment day are taken to have been made in the year the amalgamated loan is made. So for the first MYR year, P is the loan less any repayments made before the lodgment day for the year the loan was made. Section 109R disregards a repayment if a reasonable person would conclude it was funded by, or followed by, a similar or larger new loan from the same company. The ATO's examples include a shareholder who repays on 30 June and reborrows on 1 July each year. Set-offs of a declared dividend, or salary that is included in the shareholder's assessable income, still count (s 109R(3) and (4)).

Repayments need to be real. The ATO's Pine Co example concerned backdated journal entries with no money moving, and the repayment was not accepted, because a journal records a transaction rather than creating one.

Interest within the year

Interest accrues on the balance from time to time during the year at the benchmark rate. The ATO says interest is calculated annually in arrears by reference to the daily balance throughout the year. Its worked example (below) divides each balance period's days by 365: the old balance applies up to the day before a repayment, and the reduced balance from the repayment date.

Amalgamated loans

Under s 109E(3), all loans a company makes to the same entity in one income year are combined into a single amalgamated loan if each one is not fully repaid before lodgment day, would be a dividend under s 109D but for s 109N, and has the same maximum term. Each year's amalgamated loan has its own MYR. A borrower with loans made in 2023-24, 2024-25 and 2025-26 has three MYRs for 2026-27. A repayment in a later year against any constituent loan counts as a payment on the amalgamated loan (s 109E(4)).

Worked example 1: the ATO's own figures

This is the ATO's published example on its Division 7A loans page, using 2014 to 2016 benchmark rates.

• In the 2014 year, a company made two 7-year unsecured complying loans to a shareholder: $50,000 and $25,000.
• On 31 August 2014 the shareholder repaid $20,000 of the $50,000 loan. The company's lodgment day was 15 May 2015, so this counts against the 2014 year.
• Amount not repaid at the end of 2014: $75,000 less $20,000 = $55,000.

2015 MYR (benchmark rate 5.95%, remaining term 7 years):

1. $55,000 × 0.0595 = 3,272.50
2. 1 ÷ 1.0595 = 0.943841435
3. 0.943841435⁷ = 0.667257208
4. 1 − 0.667257208 = 0.332743
5. 3,272.50 ÷ 0.332743 = $9,835

The shareholder repaid a further $8,000 on 30 May 2015. Total repayments during the 2015 year were $28,000, which exceeds $9,835, so there is no deemed dividend for 2015.

2015 interest at 5.95% on the actual balance:

Period	Balance	Days	Interest
1 July to 30 August 2014	$75,000	61	$745.79
31 August 2014 to 29 May 2015	$55,000	272	$2,438.68
30 May to 30 June 2015	$47,000	32	$245.17
Total			$3,430

Closing balance at 30 June 2015: $75,000 + $3,430 − $28,000 = $50,430.

2016 MYR (benchmark rate 5.45%, remaining term 6 years): $50,430 × 0.0545 = 2,748.435, divided by (1 − 0.948316738⁶) = 2,748.435 ÷ 0.27268843 = $10,079.

Worked example 2: a 2025-26 loan, first repayment in 2026-27

This example is constructed from the law and the ATO formula.

Harbour Holdings Pty Ltd has a 30 June year end. On 1 March 2026 it lends $100,000 to its shareholder, Mia, under a written 7-year unsecured agreement signed before the company's 2025-26 lodgment day. Mia repays nothing before lodgment day, so P is $100,000 for 2026-27. The 2026-27 benchmark rate is 8.77% and T is 7.

1. $100,000 × 0.0877 = 8,770.00
2. 1 ÷ 1.0877 = 0.919371
3. 0.919371⁷ = 0.555183
4. 1 − 0.555183 = 0.444817
5. 8,770.00 ÷ 0.444817 = $19,716

Mia needs to pay at least $19,716 to the company during the year ending 30 June 2027. If she pays $15,000, the $4,716 shortfall is a deemed unfranked dividend at 30 June 2027, subject to distributable surplus.

If the loan had been secured by a registered mortgage meeting the 110% test, with a 25-year term, the 2026-27 MYR would be $9,992.

If Mia had repaid $30,000 before the 2025-26 lodgment day, P would be $70,000 and the 7-year MYR for 2026-27 would be $13,801.

Worked example 3: a loan with no agreement

From the ATO's examples: a company advances $10,000 to a shareholder on 1 January 2021 with no complying agreement. The shareholder repays $2,000 before the lodgment day of 28 February 2022. The deemed dividend for the 2021 year is the $8,000 not repaid, subject to distributable surplus.

Distributable surplus

Section 109Y caps the total deemed dividends for a year at the company's distributable surplus. If the total would exceed the surplus, each dividend is reduced proportionally. The s 109Y(2) formula is:

Net assets + Division 7A amounts − Non-commercial loans − Paid-up share value − Repayments of non-commercial loans

• Net assets is the excess of assets over present legal obligations and certain provisions (depreciation, annual and long service leave, amortisation of intellectual property and trade marks), all according to the company's accounting records at year end. The Commissioner may substitute values if the records significantly under or overvalue assets or provisions.
• Division 7A amounts are the s 109C payments and s 109F forgiven amounts for the year.
• Non-commercial loans are amounts previously deemed dividends under former s 108, s 109D or s 109E that are still shown as assets, plus certain amounts assessed under s 109XB.
• Repayments of non-commercial loans are repayments of, and certain set-offs against, loans that were earlier treated as dividends.

A company with no retained profits and only nominal share capital can still have a distributable surplus, because the measure starts from net assets on the balance sheet, not from retained earnings.

Where s 109Y reduces a dividend, s 109Y(4) and (5) require the company to give the recipient, as soon as possible after the end of the year, a written statement setting out its distributable surplus and the total dividends it would otherwise have been taken to pay under Division 7A.

Unpaid present entitlements after Bendel

On 10 June 2026 the High Court decided Commissioner of Taxation v Bendel [2026] HCA 18. The majority held that the corporate beneficiary did not make a loan to the trustee under s 109D(3), so no deemed dividend arose. The Full Federal Court had also found that unpaid present entitlements (UPEs) were not loans.

The ATO's Decision Impact Statement, dated 26 June 2026, states its position:

• Where a private company beneficiary takes no relevant action on its UPE, the Commissioner will not treat the UPE as a loan for s 109D, whether or not the entitlement is held on a separate trust (para 33).
• Where steps are taken that create a loan under s 109D(3), such as putting the UPE on complying loan terms, it will be treated as a loan. A mistaken understanding of the law does not change this (paras 34 and 38).
• UPEs arranged under TD 2022/11 or earlier guidance, including the withdrawn PS LA 2010/4, will not be treated as loans unless s 109D(3) is triggered (para 37).
• Subdivision EA may apply where a trust pays, lends to or forgives a debt of a shareholder or associate, and s 100A may apply to UPEs arising from arrangements outside ordinary family or commercial dealing (paras 27, 28, 35 and 36).
• Taxpayers assessed on the basis that a UPE alone was a loan can seek an amendment within the amendment period, or object if outside it. Out-of-time objections will be considered for an extension (paras 40 to 42).

When something goes wrong: s 109Q and s 109RB

Undue hardship (s 109Q)

If a borrower misses an MYR because of circumstances beyond their control and would suffer undue hardship if the shortfall became a dividend, the Commissioner may allow it not to be treated as a dividend. The Commissioner considers the borrower's capacity to repay when the loan was made and anything that has since reduced it.

Honest mistake or inadvertent omission (s 109RB)

Where a deemed dividend arises because of an honest mistake or inadvertent omission by the recipient, the company or anyone else whose conduct contributed, the Commissioner may decide in writing to disregard the dividend or allow it to be franked. The Commissioner must consider the circumstances of the mistake, how far and how quickly it was corrected, and whether Division 7A has operated before for the entities involved.

The ATO's guidance describes a two-step approach: first, was it an honest mistake or inadvertent omission; second, should the discretion be exercised. There is no prescribed form. A written request should cover the statutory factors and the amounts involved. Decisions are often conditional, typically on putting a s 109N agreement in place and making catch-up repayments within a set time. Franking is available only for a deemed dividend to a shareholder, not an associate. If the discretion is refused, the deemed dividend is included as an unfranked dividend, and the usual objection and review rights apply.

A year-end routine

Calculator

Our Division 7A calculator works out the minimum yearly repayment for a 7 or 25-year complying loan for a chosen year. The ATO also publishes its own Division 7A calculator and decision tool.

Ask Nagaris includes a Division 7A skill covering loans, minimum repayments and the benchmark rate. See Ask Nagaris.

Questions

What is the Division 7A benchmark interest rate for 2026-27?

8.77% for private companies with a 30 June year end, for the income year ending 30 June 2027. The 2025-26 rate was 8.37%.

When is the lodgment day for Division 7A?

It is the earlier of the due date for lodging the company's tax return for the year and the date the return is actually lodged (s 109D(6) ITAA 1936).

How long can a Division 7A loan run?

Up to 25 years if 100% of the loan is secured by a registered mortgage over real property worth at least 110% of the loan when first made, otherwise 7 years (s 109N(3)).

Is interest payable in the year a Division 7A loan is made?

No. The minimum interest rate applies to years after the year the loan is made, and the first minimum yearly repayment is due in the following year.

What happens if a minimum yearly repayment is missed?

The shortfall is treated as an unfranked dividend at the end of the company's year under s 109E, limited by distributable surplus. The Commissioner can disregard it in limited cases under s 109Q or s 109RB.

Are unpaid present entitlements still Division 7A loans after Bendel?

The ATO says it will not treat a UPE as a loan where the company beneficiary takes no relevant action on it, but a UPE put on loan terms will be a loan. The ATO is withdrawing TD 2022/11 and reviewing related guidance.

Sources

• Income Tax Assessment Act 1936, Volume 2 (Part III Division 7A, compilation 1 October 2026), Federal Register of Legislation
• ATO: Division 7A benchmark interest rate
• ATO: Loans by private companies (Division 7A)
• ATO: Division 7A trust entitlements
• ATO: Decision Impact Statement, Commissioner of Taxation v Bendel [2026] HCA 18
• ATO: The Commissioner's discretion under section 109RB
• ATO: Division 7A calculator and decision tool