Division 7A explained simply, for owners who keep hearing the term from their accountant.

Division 7A is the tax law (ITAA 1936) that treats certain payments, loans and debt forgiveness from a private company to a shareholder or associate as an unfranked dividend, unless repaid, documented under a complying loan agreement, or otherwise excluded. It commonly catches money or assets drawn informally from a company, which is why Prismi is often engaged to provide the independent market valuation an asset transfer needs.

Why your accountant keeps raising this

Division 7A (ITAA 1936) exists to stop private company profits being extracted tax-free through informal arrangements instead of dividends or wages. If you or an associated entity (a family trust, another company you control, a related individual) has received money, the use of a company asset, or had a debt forgiven by a private company, and there is no proper paper trail, the ATO can treat the full amount as an unfranked dividend in your hands — taxed at your marginal rate, with no franking credit to soften it. This is why accountants raise it every time a director's loan account moves, a related trust draws funds, or a company asset (a car, a property, boat) is used personally without a lease or licence agreement. The trigger is usually mechanical, not a judgement call — which is exactly why it is easy to fall into by accident.

What Division 7A actually catches

• ·Loans from a private company to a shareholder or their associate that are not repaid or documented under a complying loan agreement by the company's lodgment day
• ·Payments — cash, or the transfer or use of a company asset — made to a shareholder or associate outside wages, genuine debts, or excluded categories
• ·Debt forgiveness — where a private company releases a shareholder or associate from an obligation to repay an amount owed
• ·Unpaid present entitlements (UPEs) owed by a trust to a corporate beneficiary — historically an ATO administrative flashpoint, though the High Court's 2026 Bendel decision has narrowed when a UPE is treated as a Division 7A loan (see below)
• ·Amounts routed through interposed entities to get money to a shareholder indirectly (the interposed entity rules)

Complying loan agreements: terms, rate and repayments

If a payment is caught, a deemed dividend can still be avoided if the amount is put under a written complying loan agreement before the company's lodgment day for the year the loan was made, and minimum yearly repayments are made from then on. There are two structures: an unsecured loan, which must be fully repaid within 7 years; or a loan secured by a registered mortgage over real property (with sufficient equity, generally at least 110% of the loan at the time it's put in place), which can run for up to 25 years. Interest charged must be at least the ATO's benchmark interest rate for that income year — set annually by reference to the RBA's standard variable housing loan rate published just before the start of the financial year, and changing every year, so always confirm the current published figure rather than relying on a prior year's rate. Minimum yearly repayments are calculated from the benchmark rate and the loan's remaining term, amortising the loan so it is fully repaid by the end of its term. Missing or under-paying a minimum repayment in a given year triggers a deemed dividend for that year's shortfall — the loan itself is not voided, but the shortfall is taxed.

Payments by way of asset use or transfer — where a market valuation is required

Division 7A does not only catch cash — where a private company transfers an asset to a shareholder or associate, or lets them use a company asset for less than an arm's-length amount, the value of that benefit is what gets assessed, and that value has to be substantiated. For an asset transfer, this typically means an independent market valuation of the asset as at the transfer date, prepared consistent with the ATO's market valuation guidelines and the IVS 104 bases-of-value framework, to a standard that would hold up if the ATO asks how the figure was reached. For a right to use an asset, it usually means a market rate of hire or licence fee, benchmarked against comparable arrangements. Undervaluing the transfer, or failing to document how the market value was determined, is one of the most common ways an otherwise manageable Division 7A position becomes a larger deemed dividend than it needed to be. This is a valuation and evidentiary question, not a tax-position judgement call — Prismi prepares the independent market valuation, reported to APES 225 standard; your accountant or tax agent determines the Division 7A tax treatment that follows from it.

Distributable surplus, and the UPE position after Bendel

A deemed dividend under Division 7A is capped at the company's distributable surplus for the year — broadly, net assets less share capital and certain other amounts, calculated under a specific statutory formula rather than accounting equity. A company with a large loan balance but a small or negative distributable surplus may have a much smaller deemed dividend than the loan amount suggests — but this calculation needs to be done properly each year, not assumed. Unpaid present entitlements (UPEs) owed by a trust to a corporate beneficiary have been a major Division 7A flashpoint: the ATO's guidance (TD 2022/11, which replaced the earlier PS LA 2010/4 administrative position) treated an unpaid entitlement left in the trust as, in substance, a loan back to the trust. In Commissioner of Taxation v Bendel [2026] HCA 18, the High Court rejected that view, holding that a UPE does not of itself constitute a loan for Division 7A purposes — a significant, recent change to a long-running area of dispute. The ATO's administrative response to the decision was still developing at the time of writing, so how existing UPE arrangements are treated going forward is a live question. This is a fast-moving area of tax law and squarely a matter for your registered tax agent, not something Prismi advises on.

Fix-up options when a breach has already happened

Where a Division 7A problem is identified before lodgment — a loan made during the year, an asset transferred, a UPE arrangement in place — the standard fix is putting a complying loan agreement in place (or repaying the amount) before the company's lodgment day. Where an existing complying loan has fallen out of compliance (a missed minimum repayment, for example), the ATO can exercise discretion under section 109RB to disregard the deemed dividend or allow the arrangement to be corrected, but only where the shortfall arose from an honest mistake or inadvertent omission and the taxpayer requests the discretion — it is not automatic and is assessed case by case. Where an asset transfer or use is the issue and the value applied was wrong or undocumented, an independent, evidence-led valuation prepared as at the correct date is often the first step in working out the actual size of the exposure and what corrective action is realistically available. None of this is tax advice — Prismi does not determine which fix-up option applies or lodge a section 109RB request; that sits with your registered tax agent, who we work alongside when the market value of an asset needs to be established.

The right valuation tier for a Division 7A asset transfer or fix-up

The engagement scope depends on the asset and how the figure will be used, not on the size of the Division 7A exposure alone. A single straightforward asset transfer (a property or vehicle moved out of a company) is typically an Essential engagement, from $1,495 + GST, with a 10–14 business day turnaround — sufficient where one asset needs a supportable market value at one date, reported to APES 225. Where the transfer involves a trading business interest, goodwill, or an entity with more complexity, a Comprehensive engagement, from $3,995 + GST (15–25 business days), tests multiple methodologies consistent with IVS 104 and gives a more thoroughly evidenced report. If the ATO has already raised questions about a prior transfer, or the position needs to withstand active review, a Defensible Valuation File, from $8,995 + GST (25–35 business days), builds the full working-file standard of evidence set out in the ATO's market valuation guidelines. Where your tax agent needs the valuation date to match an earlier transfer or restructure event, retrospective valuations are available at +$495 per historical date. All fees are fixed at engagement and are never contingent on the value concluded.