In many family businesses the company’s money and the family’s money are not kept as far apart as the accountant would like. The company pays a child’s school fees, lends a deposit for an apartment, or covers a parent’s costs overseas. Over the years, a “loan account” quietly grows.
Division 7A of the income tax law is the reason accountants worry about these amounts. It can treat money taken out of a private company by a shareholder or their family as an unfranked dividend, taxed in their hands. This article explains Division 7A in plain terms, including why it matters when a shareholder dies or the business passes to the next generation.
What Division 7A is trying to stop
A private company pays tax at the company rate. When profits reach shareholders as dividends, the shareholders pay tax at their own rates, with a credit for company tax. Division 7A stops shareholders and their associates from getting the use of company profits tax-free through a loan, a payment or a forgiven debt instead of a taxed dividend.
“Associates” is broad. It includes a shareholder’s spouse, children, parents and other relatives, as well as companies and trusts they control. A payment to an adult child overseas, or to the family trust, can therefore be caught just as much as a payment to the shareholder.
The three main triggers
Loans
A loan from the company to a shareholder or associate is generally treated as a dividend unless, before the company’s “lodgment day” for that year, it is either fully repaid or put under a complying written loan agreement. Lodgment day is the earlier of the due date and the actual date the company lodges its tax return. Repayments that are quickly re-borrowed may be disregarded.
Payments
A payment or transfer of property to a shareholder or associate, such as paying their personal bills, letting them use a company-owned car or holiday home for free, or transferring an asset for less than its value, can be treated as a dividend. In some cases a payment can be converted to a complying loan before lodgment day.
Debt forgiveness
If the company forgives a debt owed by a shareholder or associate, the forgiven amount can be treated as a dividend. Writing off an old loan account in the books, or simply agreeing that “nobody needs to repay that”, can have this effect.
The deemed dividend is generally capped at the company’s distributable surplus, broadly its accumulated profits, and is usually unfranked.
Complying loan agreements
A loan that meets the Division 7A requirements is not treated as a dividend. In general terms, a complying loan must:
- be in writing, signed and dated, and in place before the company’s lodgment day;
- charge interest each year at least at the benchmark interest rate published by the ATO;
- have a maximum term of seven years if unsecured, or 25 years if secured by a registered mortgage over real property, where the property’s value covers the loan by the required margin; and
- be repaid by at least the minimum yearly repayment, which is calculated each year from the benchmark rate, the balance and the remaining term.
If a minimum yearly repayment is missed, the shortfall can itself become a deemed dividend. Repayments are often made by declaring a dividend or salary and offsetting it against the loan, which requires proper paperwork. Back-dated journal entries are not accepted.
Unpaid present entitlements to a family company
Many family groups have a trust that distributes income to a “bucket” company, with the cash staying in the trust. The company’s unpaid entitlement is called an unpaid present entitlement (UPE). For entitlements arising from 1 July 2022 the ATO’s view was that such a UPE could become a loan for Division 7A.
That view has changed. In June 2026 the High Court held in the Bendel case that a UPE, on its own, is not a loan for Division 7A. The ATO has accepted the decision and withdrawn its determination on the issue. However, the ATO has said other provisions may still apply, including Subdivision EA (which deals with the trust lending or paying money to a shareholder of the company) and section 100A. UPEs already converted into complying loans generally remain loans. Families with large UPE balances should review them with their accountant rather than assume the problem has gone away.
The proposed 30% minimum tax on discretionary trusts from 1 July 2028, introduced on 14 October 2026 and not yet law, would give no credit for the trustee’s tax to company beneficiaries. If it passes, many families may rethink distributing to bucket companies at all.
Why Division 7A matters in succession and estates
Division 7A problems often come to light at the worst time: when a founder dies, loses capacity, or hands the business over.
- A deceased shareholder’s loan account. If the founder owed the company money under a Division 7A loan, that debt does not disappear on death. It is a liability of the estate. The executor may need to keep up the minimum repayments, repay the loan from estate assets, or negotiate how it is dealt with. Simply forgiving the debt can raise tax issues.
- Money owed by the company to the founder. The reverse is also common: the founder lent money to the company over the years. That credit loan account is an estate asset, and the Will should deal with who receives it, especially if one child takes the shares and another does not.
- Unequal treatment of children. If the company has lent money to one child to buy a home, and that loan is forgotten, siblings who inherit equal shares may in effect be funding it. This is fertile ground for family disputes.
Practical steps for family companies
- Ask your accountant for a list of all loan accounts between the company, shareholders, relatives and family trusts.
- Make sure each Division 7A loan has a signed agreement made before lodgment day, and that minimum repayments are being made.
- Stop the company paying family members’ personal expenses unless it is properly recorded as salary, a dividend or a complying loan.
- Review UPEs owed by family trusts to companies in light of the Bendel decision and the ATO’s response.
- Check that your Will, and any shareholders’ agreement, deal with loan accounts on death, in both directions.
Frequently asked questions
What is a Division 7A loan?
It is a loan from a private company to a shareholder or an associate, such as a relative or family trust. Unless it is repaid or put under a complying written agreement before the company’s lodgment day, it is generally treated as an unfranked dividend to the borrower.
How long can a Division 7A loan be?
Generally up to seven years if unsecured, or up to 25 years if secured by a registered mortgage over real property that meets the value requirement. Interest must be charged at least at the ATO benchmark rate and minimum yearly repayments must be made.
Is an unpaid present entitlement still a Division 7A loan?
Following the High Court’s Bendel decision in June 2026, a UPE on its own is not a loan for Division 7A. The ATO has warned that other rules, including Subdivision EA and section 100A, may still apply, so existing arrangements should be reviewed.
What happens to a Division 7A loan when the shareholder dies?
The loan remains a debt owed by the estate. The executor may need to keep making repayments or repay it from estate assets. Forgiving the debt can have tax consequences, so the executor should get advice before deciding.
How Chua Tan Associates can help
Division 7A is usually managed by the accountant, but its effects reach the family’s legal documents: loan agreements, mortgages securing loans, shareholders’ agreements, Wills and the administration of estates. Chua Tan Associates prepares and reviews these documents, advises executors dealing with a deceased shareholder’s loan accounts, and helps families agree how loans to individual children should be treated, using mediation where the family cannot agree. Justin Chua trained in accounting and is an Accredited Family Business Advisor and Nationally Accredited Mediator, and we work alongside the family’s accountant in English, Mandarin and Cantonese. Division 7A is technical and has recently changed, so we recommend any decision be made with advice from a qualified tax adviser working together with your lawyer.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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