Running a company in Australia always involves a balancing act between driving growth and staying on the right side of the Australian Taxation Office. When directors or shareholders dip into company funds for anything other than genuine business purposes, the ATO watches closely. Over the past two years the regulator has increased audits, issued thousands of Director Penalty Notices and lifted general interest charge rates to more than eleven per cent. In 2025 small and medium-sized enterprises (SMEs) face a compliance landscape that is tougher, better resourced and less forgiving than at any point since before the pandemic. Understanding the tax rules about using company money, particularly Division 7A of the Income Tax Assessment Act 1936 and the Fringe Benefits Tax Assessment Act 1986, has never been more important.
The Legal Foundation: Division 7A, FBT and Directors’ Duties
Australian tax law contains several overlapping regimes that govern how owners access corporate funds. Division 7A turns certain payments, loans and debt forgiveness by a private company to a shareholder or associate into a “deemed dividend”, which must be reported in the recipient’s income tax return. The Fringe Benefits Tax (FBT) rules capture other benefits provided in respect of employment, anything from paying a director’s personal school fees to providing a holiday house. On top of that, the Corporations Act 2001 imposes duties of care, diligence and good faith on directors, making personal liability a real threat if company cash is misused. Because these laws operate in parallel, one transaction can trigger all three regimes at once.
What Counts as Company Money and Why the Distinction Matters
Company money includes every dollar and every asset the company owns, regardless of whether it sits in the trading account, a mortgage offset account or a cryptocurrency wallet. The ATO does not care if you are the sole director and shareholder; the company is a separate legal entity. Mixing personal and corporate cash flows blurs that separation and immediately raises red flags. When auditors reconstruct bank statements, they look for transfers that lack a clear business purpose, payments that benefit related parties, and loans that have no written agreement. If they find them, they reclassify them according to Division 7A or FBT and issue amended assessments plus penalties.
Permitted Uses of Company Funds
You can absolutely use company money, provided the purpose is commercial and properly documented. Paying suppliers, employee wages, rent on business premises and deductible marketing expenses all constitute legitimate uses. You can also lend money to shareholders or pay them dividends, but only when you follow the precise rules. The ATO accepts that companies may reimburse directors for out-of-pocket business costs or pay reasonable salaries that reflect market rates. If the transaction sits squarely within these boundaries and you keep records for at least five years, compliance risk drops dramatically.
Table 1: Typical Transactions That Do Not Breach Division 7A or FBT
| Transaction type | Key conditions satisfied | Tax treatment |
|---|---|---|
| Salary paid to director | Market rate, reported via Single Touch Payroll, PAYG withheld | Deductible to company, assessable to director |
| Reimbursement of business travel | Expense substantiated by tax invoice, wholly business-related | No FBT, deductible to company |
| Loan to shareholder | Written Division 7A loan agreement signed before lodgement day, benchmark interest (8.30 % for 2024-25) charged, minimum yearly repayment made | Not a deemed dividend |
Common Traps and Prohibited Uses That Trigger Division 7A or FBT
Problems start when directors treat the company bank account like a personal piggy bank, paying private school fees, buying a family boat, or covering a home mortgage. Even small, regular transactions such as personal groceries on a company credit card create issues. The ATO’s data-matching systems now pick up these patterns within weeks. If the payment is not a bona fide dividend or fully compliant loan, Division 7A automatically reclassifies it as an unfranked dividend. That pushes the tax burden to the shareholder’s marginal rate and denies the company a deduction. If the benefit flows to someone in their capacity as an employee or director, FBT can also apply at a flat 47 % of the grossed-up value.
Understanding Division 7A Loans in Plain English
Division 7A exists to stop shareholders enjoying tax-free use of company profits. It does not ban loans outright; it forces them to look and feel like arms-length commercial arrangements. To avoid a deemed dividend, you need a written agreement that specifies the loan amount, the interest rate at or above the ATO’s annual benchmark, a maximum term of seven years for unsecured loans (or 25 years if properly secured by real property) and a minimum yearly repayment formula. Repayments must occur by 30 June each year. If you miss even one payment, the outstanding balance becomes a dividend at year-end.
Table 2: Division 7A Minimum Yearly Repayment Example (Unsecured Loan)
| Loan balance at start of 2025 income year | Benchmark interest rate 2024-25 | Minimum repayment formula | Minimum repayment due 30 June 2025 |
|---|---|---|---|
| $200,000 | 8.30 % | Balance × rate / (1 + rate) | $15,330 |
Fail to pay the $15,330 by 30 June 2025 and the ATO will treat the entire unpaid loan balance as a dividend.
Fringe Benefits Tax: When Perks Become a 47 % Problem
Where Division 7A focuses on shareholders, FBT looks at employees and directors in their employment capacity. If your company pays for a director’s personal gym membership, that is an expense-payment fringe benefit. Because FBT is charged at 47 % on the grossed-up amount, a $1,000 gym membership can cost the company more than $940 in FBT, depending on whether the type 1 (GST-inclusive) or type 2 gross-up rate applies. Unlike income tax, FBT is a separate tax paid by the employer, not the recipient. The due date for the FBT return is 21 May each year. Payroll tax offices in most states also include the taxable value of fringe benefits when testing annual thresholds, so ignorance can create double exposure.
Real-World Scenarios: How the ATO Treats Everyday Transactions
Imagine Nicole, the sole director of a marketing agency. She uses the company card to pay $12,000 in private school fees for her daughter, intending to “fix it up later”. She forgets. At year-end the company’s accountant identifies the payment. Because it is neither a loan under Division 7A (no written agreement) nor an allowable salary sacrifice arrangement, the entire $12,000 becomes an unfranked deemed dividend. Nicole pays tax on it at her marginal rate of 45 %, plus Medicare levy, while the company receives no deduction.
Now consider Raj, who drives a dual-cab ute purchased by the company for $70,000. The ute is used 60 % for business, 40 % for personal weekend trips. Raj keeps a valid logbook for 12 weeks showing the split and reimburses the company for fuel on personal trips. The company applies the operating cost method for car FBT. Because Raj substantiates business use, the taxable value drops to $28,000. FBT still applies but at a much lower figure, and Raj avoids Division 7A entirely because the benefit relates to employment, not shareholding.
Step-by-Step Compliance Process for Directors and Bookkeepers
First, classify every non-wage payment to directors and shareholders on the day it occurs. Is it a loan, a dividend, an expense reimbursement or a fringe benefit? Second, gather evidence, a tax invoice, loan agreement or board minute, and store it securely. Third, calculate the tax consequences before 30 June so there is time to fix problems. If the company decides to set up a Division 7A loan, draft and sign the agreement before the earlier of the tax return lodgement day or the actual lodgement date. Fourth, lodge the correct forms: Company Tax Return (NAT 3092) for Division 7A dividends, FBT Return (NAT 0660) for fringe benefits. Finally, pay any tax or FBT by the due date to avoid general interest charge.
Penalties and Enforcement: What Happens When the Rules Are Ignored
The ATO’s penalty arsenal is extensive. For Division 7A breaches it will issue amended assessments reclassifying payments as unfranked dividends. Shareholders then face top marginal tax of 47 % and usually interest on the shortfall. Administrative penalties under the Taxation Administration Act start at 25 % for lack of reasonable care and rise to 75 % for intentional disregard. Where records are poor, the ATO can also impose a “failure to keep records” penalty of $5,500 per breach for companies. If FBT is involved, the company pays tax at 47 % of the grossed-up benefit plus penalties calculated the same way. In serious cases, ASIC can prosecute directors for breaching their duties, leading to fines exceeding one million dollars and potential disqualification.
Table 3: Typical Penalties for Misusing Company Funds
| Breach | Primary tax payable | Administrative penalty range | Additional consequences |
|---|---|---|---|
| Division 7A deemed dividend of $100,000 | Up to $47,000 income tax | $11,750–$35,250 | General interest charge (11.15 %), potential DPN |
| Unreported FBT benefit valued at $50,000 (grossed-up) | $23,500 FBT | $5,875–$17,625 | Payroll tax reassessment, ASIC action |
Practical Strategies to Stay Compliant and Sleep at Night
Build a culture of separation between company and personal finances. Open separate bank accounts for GST, PAYG withholding and super, so operating cash does not “accidentally” drift into personal spending. Use cloud accounting software with bank rules that automatically code director loans and flag exceptions. Schedule quarterly board meetings, even if you are the only director, to minute any decisions about loans or dividends. Review the ATO benchmark interest rate each July and adjust loan repayments immediately. Engage a tax adviser to perform an annual Division 7A health check before the end of May, giving you at least a month to correct issues. Finally, educate staff and family members who have company credit cards, because one careless tap can trigger weeks of cleanup work.
2025 Updates You Cannot Ignore: Benchmark Interest, CbC Reporting and More
From 1 July 2024 the Division 7A benchmark interest rate jumped to 8.30 %, its highest level in more than a decade, pushing minimum yearly repayments significantly higher. The ATO has also narrowed exemptions from Country-by-Country reporting, meaning more mid-tier groups with foreign subsidiaries must disclose related-party transactions, including loans. While this might feel unrelated to domestic cash drawings, the information feeds the ATO’s risk-engine, prompting targeted Division 7A reviews. In addition, the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share) Bill 2024, due to commence on 1 July 2026, will require detailed disclosure of inter-company dealings, so systems put in place now will future-proof compliance.
Frequently Asked Questions from Australian SME Owners
Can I use company money to pay a personal bill if I repay it next week? Yes, but only if you treat the advance as a Division 7A loan and sign an agreement before lodgement day. Otherwise the ATO deems it a dividend, even if you pay it back.
Is paying myself a dividend safer than a loan? Dividends can be franked and avoid Division 7A, but they must come from profits and carry franking credits. They also reduce retained earnings. A loan preserves capital yet imposes strict repayment rules. The right answer depends on cash flow and tax brackets.
What about buying a company car and using it on weekends? A company can provide a car, but personal use triggers FBT unless the vehicle meets the work-horse exemption. Keep a logbook to reduce the taxable value.
How long must I keep Division 7A records? At least five years after the transaction or the last repayment, whichever is later. Because seven-year loans span multiple tax periods, most advisers recommend storing documents for a full twelve years.
Put Governance at the Heart of Your Cash Flow
Accessing company money is not forbidden; it is simply regulated. Directors who understand Division 7A and FBT can still enjoy flexibility, whether that means legitimate shareholder loans, franked dividends or carefully structured fringe benefits. The cost of ignorance, however, keeps rising as benchmark interest rates, penalty rates and ATO audit resources increase. By embedding clear processes, documenting every transaction and engaging advisers early, Australian SMEs can spend less time worrying about tax surprises and more time growing their businesses. In 2025 sound governance is not a bureaucratic burden, it is the cheapest insurance policy you will ever buy.
Finding it all difficult to grasp?
Don’t worry, you’re not alone. Navigating Division 7A, FBT, and director responsibilities can feel overwhelming, especially while trying to grow your business. That’s where we come in.
Contact EEA Advisory today at eea-advisory.com.au for practical guidance, tax compliance support and clear advice tailored to your situation. We help SMEs like yours stay on the right side of the ATO while keeping your financial strategy on track.
