Division 7A keeps director loans honest. It converts what looks like a friendly advance from a private company into an unfranked dividend if the loan is not on strict commercial terms. For the 2025–26 income year the Australian Taxation Office has locked in a benchmark interest rate of 8.37 per cent. That rate sets the floor for the interest you must charge on any complying loan and also feeds directly into the minimum yearly repayment your company or client has to make by 30 June. Get the paperwork or the repayment wrong and the loan can morph into taxable income in the director’s own tax return. This guide explains the current benchmark rate, the practical repayment formula, the main triggers for a deemed dividend and the changes already announced for 2026–27 so you can manage Division 7A risk well before financial year-end.
What Division 7A director loans mean in 2026
Division 7A appears in Part III of the Income Tax Assessment Act 1936. It stops private companies from pushing value to shareholders or their associates without a franked dividend. The most common pathway is the so-called director loan. When a shareholder, director or other related party withdraws cash, pays personal expenses from the company credit card or runs drawings through the loan account, they are effectively borrowing from the company. Unless that borrowing is fully repaid or documented as a complying loan before the company lodges its tax return, Division 7A can deem an unfranked dividend equal to the outstanding balance. The recipient then pays marginal tax on money they had assumed was tax-free.
The law treats a broad range of financial accommodation as a loan. A simple transfer of funds, an advance through an offset account, writing a cheque, or even a credit sale that gives the shareholder time to pay can all fall within the definition. Importantly the ATO looks at purpose through the eyes of a reasonable person. If the arrangement would not have happened on the same terms for someone who was not a shareholder or associate, Division 7A is in view.
The benchmark interest rate for the 2025–26 income year
Every July the ATO publishes one simple figure labelled Division 7A benchmark interest rate. The number is based on the Reserve Bank’s indicator lending rate for owner-occupier variable housing loans and is locked in for the whole income year. For companies with a standard 30 June balance date the relevant rates are shown below.
| Income year | Benchmark rate |
|---|---|
| 2025–26 | 8.37 per cent |
| 2026–27 | 8.77 per cent |
A substituted accounting period company uses the rate last published before the start of its own income year. For most private companies the key point is that the rate does not change once the year begins. Even if the RBA shifts monetary policy during the year, the benchmark for Division 7A remains fixed until the next year’s figure is released.
Why the benchmark rate matters for every repayment
For a loan to be complying it must satisfy three pillars. First the interest rate in the loan agreement cannot fall below the benchmark rate for each year of the term. Second the maximum term is seven years for unsecured loans or twenty-five years when the loan is secured by a registered mortgage over real property with enough equity. Third the parties must sign a written agreement before the company’s lodgement day for the year the loan was made.
Most accountants worry about interest because it flows straight into the minimum yearly repayment, often called the MYR. If the interest charged for the year is less than the benchmark rate, the shortfall effectively increases the loan balance. That in turn inflates the MYR for the next year and can create a snowball. Worse, if no agreement exists or if the MYR is missed, the outstanding amount is deemed a dividend at the end of the income year in which the breach occurs.
Calculating the minimum yearly repayment
The ATO publishes a calculator that applies the statutory formula. Behind the scenes the calculation works like an amortising home loan. The principal outstanding at the end of the prior year is multiplied by the benchmark interest rate to give the interest component. The term of the loan then determines the principal component needed so that the loan would be fully repaid by the end of the seventh or twenty-fifth year. The sum of those two components is the MYR for the current year.
For a fresh unsecured loan the term for MYR purposes is seven years. In year one no MYR is required as long as the agreement was signed before the lodgement day. From year two through year seven the MYR must be paid in full by 30 June each year. If the borrower pays extra in any year the future MYR falls because the principal outstanding is lower.
Worked repayment example for a seven year unsecured loan
Imagine a private company with a 30 June year end lends 200 000 dollars to its sole director on 1 July 2025. They sign a Division 7A loan agreement on the same day. Because the loan is unsecured the term must not exceed seven years. During the first year the borrower may choose to make voluntary repayments but there is no statutory obligation. The loan balance at 30 June 2026 is therefore still 200 000 dollars.
For the 2026 income year the benchmark interest rate is 8.37 per cent. The ATO formula calculates interest of 16 740 dollars (200 000 × 8.37 percent). The amortisation schedule then spreads the principal evenly so that the loan repays by the end of year seven. The principal component for year two is 33 333 dollars. The MYR for the 2026 income year is therefore 50 073 dollars being 16 740 in interest plus 33 333 in principal.
The director must pay at least 50 073 dollars to the company in cash or by set-off of salary or dividends before 30 June 2026. If the payment is one dollar short the unpaid portion can become a deemed dividend. If the director pays more than the minimum, say 60 000 dollars, the extra principal reduces the future MYR while the interest component for the following year also falls because the benchmark rate applies to a smaller balance.
The traps that trigger a deemed dividend
Division 7A is mechanical once the facts are clear. The most common traps still catch many small and medium enterprises.
A loan without a written agreement in place before the company lodges its return is fatal. The entire unpaid balance at the end of the income year in which the loan was made is treated as a dividend even if the parties intended commercial terms.
A missed MYR in any later year is equally serious. The shortfall at the end of that year is a deemed dividend. The company cannot retrospectively increase the interest charged or backdate a repayment to fix the breach.
Charging interest below the benchmark rate appears minor but compounds quickly. Any shortfall is treated as additional principal which bumps up the next MYR. When that MYR becomes unmanageable the borrower often defaults, which then crystallises a dividend.
Using a short-term loan to clear the MYR can misfire. Borrowing funds from the same company or an associated entity to make the repayment is ineffective because the cash never really leaves the corporate group. The ATO regards such circular payments as non-events.
Failing to refinance an unsecured loan that drags beyond seven years can also trigger Division 7A. The original loan agreement cannot be simply rolled over unless the company pays out the balance or puts in place a fresh secured loan that meets the stricter twenty-five-year criteria and registers a mortgage over real property with enough equity.
Common mistakes directors still make
Directors often rely on last year’s benchmark rate when they estimate cash flow for the next repayment. The result can be a nasty surprise when the ATO announces a higher figure. The jump from 8.37 per cent to 8.77 per cent for 2026–27 may sound small but on a half-million-dollar balance it adds more than two thousand dollars to the interest component alone.
Many private groups treat the loan account as a clearing house for personal and business transactions and only attempt to square up just before 30 June. That approach makes it easy to lose track of the real balance. It is safer to capture any drawings as fringe benefits or wages during the year so that tax is withheld and paid through single touch payroll. The loan account then records only genuine loans.
A casual promise to pay interest or principal after year-end is another pitfall. Division 7A demands that the borrower actually pays the money by 30 June. Journal entries without supporting cash flow or set-off against dividends that have not yet been declared will not suffice.
Some advisers believe a loan below ten thousand dollars escapes Division 7A. The law does include a minor loan exclusion but it applies only if the total loans outstanding at any time in the income year do not exceed the threshold and the borrower repays the balance before lodgement day. Many directors exceed ten thousand dollars at some point, therefore losing the exclusion without realising.
Staying compliant before 30 June 2026
The safest strategy starts with a reconciliation of every shareholder and associate loan account well before year-end. Once the real closing balance is known the company can use the ATO calculator to identify the exact MYR. Paying that figure in cash, or applying a franked dividend that the company has formally declared and recorded, ensures the repayment is genuine.
Companies that have several Division 7A loans can consider consolidation. The law allows multiple loans made in the same income year to be treated as one amalgamated loan. Refinancing an unsecured loan into a properly secured twenty-five-year loan can also reduce the MYR dramatically. The property offered as security must provide equity of at least 110 per cent of the loan amount when the mortgage is registered, and the mortgage must cover the entire loan.
Directors should also review every loan agreement for accuracy. The agreement should state the correct benchmark rate for each year, set clear repayment dates and reference the right term. If the agreement allows interest to capitalise, remember that the capitalised interest itself is principal and therefore increases the MYR.
Finally, monitor cash flow in the last week of June. Bank processing delays or public holidays can push a transfer into July, which the ATO will treat as late. Making the repayment a few days early removes that timing risk.
Looking ahead to the 2026–27 income year
The ATO has already published 8.77 per cent as the benchmark rate for the 2026–27 income year. Directors should update forecasts and budget for a higher MYR if interest rates rise further. A company that makes a fresh loan on or after 1 July 2026 must use the new benchmark rate from day one. Existing loans will also adopt 8.77 per cent for the purpose of calculating next year’s MYR even if the agreement still shows 8.37 per cent. The parties do not need to amend the written agreement each year, but they must apply the new benchmark when working out the repayment.
Frequently asked questions
What is the Division 7A benchmark interest rate for 2025–26
The rate is 8.37 per cent. It applies to loans made by private companies with a 30 June 2026 year end and remains fixed for that entire year.
What is the Division 7A benchmark interest rate for 2026–27
The ATO has confirmed 8.77 per cent. This higher rate applies from 1 July 2026 for standard year-end companies.
How does the written agreement affect Division 7A loans
A written loan agreement signed before the company’s lodgement day is compulsory. It must identify the parties, state the amount borrowed, set a maximum term of seven years if unsecured or twenty-five years if properly secured, and charge interest at least equal to the benchmark rate each year. Without that agreement the loan is almost always treated as an unfranked dividend.
When must the minimum yearly repayment be made
The borrower must pay the MYR in full on or before 30 June of each income year after the year in which the loan was made. Late payments do not repair a breach.
Do small loans under ten thousand dollars attract Division 7A
A loan can be excluded if the total of all loans to that borrower never exceeds ten thousand dollars during the income year and the borrower repays the balance in full before lodgement day. Once the running balance exceeds the threshold at any time, the exclusion is lost for that year.
Final thoughts
Division 7A is one of the most rigid regimes in the tax law. The rules are simple but unforgiving. The 8.37 per cent benchmark rate now applies for the 2026 income year and the 30 June deadline for the minimum yearly repayment will arrive faster than most directors expect. Getting the interest right, keeping agreements on file and making real repayments in time are the only ways to avoid a costly deemed dividend. With the ATO already publishing a higher benchmark for 2026–27, now is the moment to review every shareholder loan, lock in funding for the repayment and, where possible, restructure unsecured balances into properly documented long-term facilities. A disciplined approach in the next few months will keep private company profits inside the company and the director out of trouble with the tax office.
