Division 7A loans for practice companies

Division 7A treats certain loans, payments and forgiven debts from a private company to a shareholder or their associate as an unfranked dividend. That is taxable income with no franking credits attached, the least efficient way a practice owner can ever take money out of their own company, and it catches informal arrangements just as readily as deliberate ones.

What Division 7A catches

The rules apply to private companies, which describes most medical practice service entities. Where such a company lends money to a shareholder or an associate, and the loan is not repaid or put under a complying arrangement by the company's lodgement day for the year the loan was made, the outstanding amount is treated as a dividend.

It is not limited to cash loans. A payment made on behalf of a shareholder, and a debt the company forgives rather than collects, are both treated the same way. Money the company spends for the private benefit of the shareholder is caught whether or not anyone ever called it a loan.

What makes a loan complying

A complying Division 7A loan has four requirements, and each one is a hard requirement rather than a matter of degree. It must be in writing. It must charge interest at no less than the ATO benchmark rate for the year the loan was made. It must have a maximum term of seven years if unsecured, or twenty-five years if secured over real property. And the agreement must be in place before the company's lodgement day.

An unwritten loan between a company and its own director is not complying, however clear everyone's intentions were, and an interest rate a fraction below the benchmark invalidates the whole arrangement for that year.

The minimum yearly repayment

A complying agreement is not enough on its own. Each year the borrower must make the minimum yearly repayment: the amount that would pay the loan off over its remaining term at the benchmark rate. Interest is charged first and the remainder reduces the principal, so the repayment is front-loaded and falls each year as the balance falls.

A borrower who pays the same amount every year is overpaying early and underpaying later, which is a common way for a loan that looked complying in its early years to fail the test near the end of its term.

What happens when the repayment is missed

Only the shortfall, not the whole loan, becomes a deemed dividend in that year. A borrower required to repay $18,000 who repaid $12,000 has a $6,000 dividend, taxed at their marginal rate with no franking credits to offset it.

From there the company has three options for the shortfall: treat it as a dividend and let the shareholder pay the tax, put it under a fresh complying loan agreement, or have it repaid. Only the first happens automatically. The other two need to happen deliberately, and within the time the rules allow.

The benchmark rate, and the two traps that recur

The ATO publishes the Division 7A benchmark rate each year, broadly tracking the RBA indicator rate. For 2026-27 it is 8.77%, up from 8.37% in 2025-26. The rate that decides whether a loan is complying is fixed at the year the loan was made; the rate that governs a minimum yearly repayment is the one for the year the repayment falls due.

Two mistakes recur in practice structures. The first is the offset: a shareholder lends their own money to the company in one direction and takes money out in the other, and assumes the two net off. They do not, and the withdrawal is still caught. The second is timing: the loan agreement has to exist before the lodgement day, so preparing it once the accountant asks for it is already too late.

What to do next

Use the Division 7A Loan calculator to work out the minimum yearly repayment on an existing loan, or model one before it is drawn down. It treats the loan as running for whole years and does not cover sub-trust arrangements or the part-year adjustment the ATO applies in a loan's first year, so a loan taken out partway through a year will have a lower first-year minimum than the calculator shows. Where a practice company has already funded something private and no agreement was in place before lodgement day, get advice before the return is lodged rather than after.