Using company funds or assets for personal purposes is a common and often necessary practice for small and medium enterprise (SME) owners. Correctly prepared and documented transactions, managed in accordance with Division 7A rules, can be used strategically to benefit the business owner. However, if there’s no clear understanding of compliance requirements, they can also trigger unexpected tax liabilities or put pressure on business cash flow.
At Equil Advisory, we help SMEs navigate Division 7A, implement compliant strategies, and safeguard cash flow before problems arise.
What Is Division 7A?
Division 7A is a set of ATO rules designed to prevent shareholders and their associates from accessing company profits and assets tax-free. It applies when a private company provides financial benefits to shareholders and associates outside normal distributions, including:
- Loans
- Payment of personal expenses
- Use of company assets (e.g., vehicles or property)
- Asset transfers or forgiven debts
- Loans between related entities that ultimately benefit an individual
Watch our Division 7A video for more information about Division 7A.
Why Division 7A Matters for Business Owners
Division 7A is easy to trigger unintentionally and businesses often have liable transactions on their balance sheets without realising the implications. For example, even small actions – like paying personal expenses with a company card – can result in non-compliance if not properly formalised or structured in line with Division 7A requirements.
The consequences of this can be significant, including:
- Personal tax at full marginal rates if deemed an unfranked dividend
- No franking credits to offset the liability and reduce tax payable
- Cash flow pressure if funds reserved for wages, growth, or debt must cover personal tax liabilities
Bringing personal transactions into the tax system as taxable income for the shareholder prevents these risks. Payments to shareholders can be treated as franked dividends where the company has already paid tax on the income. Alternatively, they can be set up as loans with repayment obligations and interest income for the company
Division 7A Loans Are Common—and Fixable
Division 7A loans of $100,000–$2 million are quite common in SMEs. They usually reflect legitimate business needs, such as cash flow support or personal investment funding. There are two main types of applicable loans:
- Unsecured loans: Must be repaid over 7 years
- Secured loans: May extend to 25 years with a registered mortgage over property
Division 7A loans can stay compliant and avoid tax penalties if they’re either fully repaid before the company lodges its tax return, or meet three specific conditions:
- Documented under a written loan agreement
- Interest charged at or above the ATO benchmark rate (this interest is taxable income for the company)
- A strict repayment schedule (minimum yearly repayments of principal and interest by June 30)
If any of these requirements are missed or repayments fall short, the loan may be reclassified as a taxable dividend. This is a common pitfall for business owners, but one that can be addressed with the right advice.
Repayment Options for Division 7A Loans
Business owners can meet minimum yearly repayments in several ways:
Cash payments from personal funds
The most straightforward approach. It keeps finances clean and separate but may create personal cash flow pressure.
Dividends
The company credits a dividend to the loan account. This is an efficient option if franking credits are available, but reduces retained earnings.
Wages or director fees
These are processed via payroll, allowing tax withholding and super payments. The net amount is credited against the loan, which can assist with personal income planning. However, it also increases the company’s payroll obligations and cash commitments.
The best repayment option depends on the company’s profits, cash flow, and the owner’s long-term strategy. It’s important here to step back and look at the bigger picture.
Strategic Considerations for Division 7A
While Division 7A loans can offer short-term flexibility, without a plan they often evolve into long-term tax burdens. Rolling them forward year after year only delays the issue, and can increase the eventual tax impact. With the right strategy, though, these loans can become a useful part of broader tax and asset planning.
There are several effective ways to manage and reduce Division 7A exposure, each suited to different business needs and goals.
Interpose a Family Trust
A family trust offers flexibility in distributing income and managing loan repayments across multiple beneficiaries (family members). This can lead to a lower overall tax liability compared to a single direct shareholder income. It’s a powerful tool, but complex, so expert advice is essential.
Use Franked Dividends Strategically
These can reduce loan balances over time and support long-term planning, while preserving compliance. However, the company needs to have sufficient franking credits available to make this a tax-effective strategy for the shareholder without negatively impacting the company’s franking account balance.
Limit Reliance on Division 7A Loans
Keeping business and personal finances separate avoids future issues.
Manage Inter-Company Loans Carefully
Loans between related companies can still trigger Division 7A if the benefit flows to an individual. Always assess the end-use of funds, not just the entities involved.
Best Practices for Division 7A Management
Effective Division 7A management starts with visibility and structure. To stay compliant and avoid costly surprises:
- Recognise shareholder loans on the balance sheet early
- Document loan terms correctly
- Review repayment plans annually
- Align loan strategy with business cash flow and tax planning
- Stay informed about legislative updates
When to Get Expert Help
If a company has made loans to shareholders, or funds have been used for personal reasons, it’s time to review Division 7A exposure. Tax outcomes depend heavily on how these transactions are structured and repaid.
At Equil Advisory, we help business owners:
- Identify and manage Division 7A risks
- Draft compliant loan agreements
- Structure repayments and dividends tax-effectively
- Optimise ownership and trust structures to reduce future risk
Stay Ahead of Division 7A Compliance
Division 7A is manageable with the right structure and support. Getting advice early helps protect your company, avoid unexpected tax bills, and make confident, strategic decisions.
Speak with the Equil Advisory team today to better understand your Division 7A obligations and how to manage them strategically. Our experts can help you protect your cash flow, stay compliant, and turn potential tax risks into opportunities for long-term planning.
