Division 7A: what happens if you've been taking money out of your company
Money in a company account belongs to the company. If a shareholder uses it privately, Division 7A can turn the amount into an unfranked dividend.
The problem is usually the label, not the transfer
Owner-managed businesses often move money during the year without deciding what the payment is. A transfer might later be treated as salary, a dividend, repayment of money the company already owed the owner, reimbursement of a business expense, or a loan. Those categories have different tax and record-keeping consequences.
Division 7A is an integrity rule for private companies. Broadly, it can treat a payment, loan or forgiven debt provided to a shareholder or an associate as an unfranked dividend. That can create personal taxable income without a franking credit, even though nobody described the transfer as a dividend at the time.
Start with the shareholder loan account
Do not wait until the company tax return is being lodged. Reconcile the shareholder and director loan accounts to the bank feed, payroll, declared dividends and expense reimbursements. The balance alone is not enough. You need to know what created it.
- Separate genuine business expenses from private spending paid by the company
- Match wages to payroll records and PAYG withholding
- Match dividends to valid resolutions, statements and franking records
- Identify amounts the company owed the shareholder before netting balances
- List every remaining advance by date, recipient and purpose
The lodgment day is the first critical deadline
A potentially affected amount can generally avoid being treated as a Division 7A dividend if it is repaid or converted to a complying loan by the company's lodgment day for that income year. The ATO defines that day as the earlier of the company's actual lodgment date and its due date.
A complying loan needs a written agreement and must meet the statutory terms, including the maximum term and at least the benchmark interest rate. An unsecured loan will commonly have a maximum term of seven years. A qualifying loan secured by a registered mortgage over real property can have a longer term if the conditions are met.
A loan agreement does not finish the job
Once the loan is on complying terms, a minimum yearly repayment is generally required by 30 June each year. The amount changes with the opening balance, remaining term and benchmark interest rate. Missing that repayment can itself produce a deemed dividend for the shortfall.
Be careful with circular repayments. Repaying a company loan with money borrowed back from the same company can be disregarded in some circumstances. A journal entry also needs a real legal and accounting basis. It should record an event that actually occurred, not create a paper solution after the fact.
What to do now
Ask for a current loan ledger before year-end, estimate the required repayment, and decide how future owner drawings will be handled. Regular salary, properly declared dividends and documented reimbursements are easier to manage than a growing suspense balance.
If an earlier year may already be affected, do not silently rewrite the ledger. The Commissioner can grant relief in limited circumstances, but the facts, timing and corrective action matter. Get advice before making entries or lodging an amendment.
Primary sources
Rules and lender requirements change. These sources were checked when this article was published.
This article is general information current at the date of publication. It doesn't take your circumstances into account and isn't tax, legal or financial advice. Speak to a registered tax agent about your situation.
