Division 7A of the Income Tax Assessment Act applies when a private company makes a loan, payment, or forgives a debt to a shareholder or associate of a shareholder (typically a director or family member). Without a 'complying Div 7A loan agreement' in place, the unrepaid amount at the company's lodgement day is treated as an unfranked dividend — taxed at the recipient's marginal rate with no franking credit, and the company gets no deduction. A nasty outcome.

The fix: put the loan on Div 7A terms before the company's lodgement day. The agreement must be in writing, charge at least the ATO benchmark interest rate (8.37% for FY 2025-26), and have a maximum term of 7 years for unsecured loans (or 25 years secured by registered mortgage over real property). Once set up, you make a minimum yearly repayment each year over the term — calculator above. Failure to make the minimum repayment in any year converts the unpaid amount to a deemed dividend that year.

Common scenarios: business owner takes drawings from their company that exceed available franked dividends; family member borrows from the family company for a property deposit; director's loan account drifts into debit balance over the year. The Div 7A regime is unforgiving — the deemed-dividend hit is at full marginal rates with no franking, often costing 30%+ extra tax on the unrepaid amount. Always have a Div 7A specialist tax accountant review private-company-to-shareholder financial flows.