Division 7A: How to Use Company Funds Without the Tax Headache

For many Australian business owners, the company bank account can feel like a personal piggy bank—until tax time rolls around. If you’ve ever wanted to extract cash from your business for personal use without immediately losing half of it to the top marginal tax rate, you need to understand Division 7A.

By structuring withdrawals as compliant loans rather than dividends, you can maintain cash flow for your family while deferring tax, potentially saving between $5,000 and $15,000 per year in upfront costs.

How Division 7A Loans Work

Normally, if a private company gives money to a shareholder for personal use, the ATO treats it as a "deemed dividend"—meaning you pay tax on the whole amount at your highest tax rate, with no franking credits to help.

A Division 7A Compliant Loan provides a legal "safe harbour." Instead of being taxed immediately, the money is treated as a genuine loan that you pay back over time.

• Benchmark Interest: You must pay interest to the company at the ATO’s set rate (currently 8.27% for the 2024–25 financial year).

• Flexible Terms: You can choose a maximum term of 7 years for unsecured loans, or up to 25 years if the loan is secured by a mortgage over real estate.

• Repayment Schedule: You must make "Minimum Yearly Repayments" (MYRs) consisting of both principal and interest by 30 June each year.

Is This Strategy Right for You?

This is an advanced strategy designed for business owners who have a "bucket company" or a trading company with excess cash. It is ideal if:

• You need funds for a private purpose (like a home renovation or a personal debt) but don't want to trigger a massive dividend tax bill today.

• Your company has a high "distributable surplus."

• You have the personal cash flow to meet the annual repayment obligations.

The goal here isn't to avoid tax forever, but to optimise the timing of when that tax is paid, allowing the capital to work for you in the meantime.

Important Risks and Rules

The ATO views Division 7A as a high-priority "integrity measure," so the compliance must be flawless:

• The "Deemed Dividend" Danger: If you miss a repayment or fail to have a written agreement in place before your tax lodgement date, the entire remaining loan balance can be "deemed" a dividend. This is taxed at your marginal rate and—crucially—it is unfranked, meaning you get no credit for the tax the company has already paid.

• Administrative Burden: Each loan requires a formal written agreement and annual calculations. If you take out new loans in different years, you may end up managing multiple repayment schedules simultaneously.

• Ongoing Interest Cost: While you are "paying yourself" (the company), that interest is assessable income for the company, meaning the company will pay tax on the interest you provide.

• ATO Scrutiny: These arrangements are a common target for audits. You must keep meticulous records of bank transfers and signed minutes to prove the loan is genuine.

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