Division 7A loans explained: the 2026-27 benchmark rate, minimum repayments and a worked example

Short answer: Division 7A is the Australian tax rule that stops a private company’s profit reaching its shareholders (or their relatives and other associates) tax-free as a loan, a payment or a forgiven debt. If you take money out of your Pty Ltd that is not salary, a declared dividend or a repaid expense, the ATO can treat it as an unfranked dividend in your hands for that year. You avoid that by repaying it, or by putting it under a complying loan agreement, before the company’s lodgment day for that year. A complying loan has a written agreement, charges at least the benchmark interest rate (8.77% for 2026-27, up from 8.37% for 2025-26) and runs for at most 7 years unsecured or 25 years secured by a mortgage over real property. From the following year, you must make a minimum yearly repayment. A $60,000 loan is worked through below.

This guide covers Australian private companies. A UK limited company has a director’s loan account instead, with its own tax rules, and a sole trader or partnership has no loan account at all: money the owner takes out is drawings.

What Division 7A catches

What happens	How Division 7A sees it	Example
The company lends you money	A loan: a deemed dividend unless it is repaid or put under a complying agreement by lodgment day	$60,000 moved to your personal account for a house deposit
The company pays a personal bill for you	A payment: a deemed dividend in the year it is made, unless it is turned into a complying loan by lodgment day	School fees or a family holiday paid from the business account
The company forgives money you owe it	A forgiven debt: a deemed dividend in the year it is forgiven	Writing off last year’s loan balance at the year end
A minimum yearly repayment is missed	The shortfall is a deemed dividend for that year	$8,000 repaid when $13,283.60 was due

Salary through payroll, dividends declared and paid as dividends, and reimbursed business expenses are not caught. The deemed dividend can be no bigger than the company’s distributable surplus (roughly its net assets beyond its paid-up capital), and it is usually unfranked, so you get no credit for the tax the company has already paid on that profit.

The four things a complying loan needs

1. A written agreement, signed before the company’s lodgment day for the year the loan was made. Lodgment day is the earlier of the day the company’s tax return is due and the day it is actually lodged.
2. Interest at least the benchmark rate for each year after the year the loan was made. The ATO sets it once a year from the Reserve Bank’s standard variable owner-occupier housing rate. Recent rates: 8.27% for 2023-24, 8.77% for 2024-25, 8.37% for 2025-26 and 8.77% for 2026-27.
3. A maximum term: 7 years, or 25 years if the loan is secured by a registered mortgage over real property worth at least 110% of the loan.
4. A minimum yearly repayment in every year after the year the loan was made, paid by 30 June. None is due in the year the loan is made.

The interest the company receives is taxable income for the company. Repaying the loan and then borrowing the same money back straight after does not count as a repayment, so it does not avoid the rule.

A worked example

A Brisbane landscaping company, Pty Ltd, with one director who is also the only shareholder. On 1 September 2025 the director transfers $60,000 from the company account to their own as a house deposit. Before the company lodges its 2025-26 return, the accountant puts the money under a 7-year unsecured complying loan agreement.

• 2025-26 (the year the loan is made): no minimum repayment is due, and nothing is a deemed dividend because the agreement was signed in time.
• 2026-27 (the first repayment year): the balance owed on 30 June 2026 is still $60,000, the rate is 8.77% and 6 years of the 7-year term are left. The minimum yearly repayment is:

Step	Figure
Balance owed at the start of the year	$60,000.00
× benchmark rate (8.77%)	$5,262.00
÷ (1 − 1.0877−6) = ÷ 0.39613	$13,283.60

So the director must pay the company $13,283.60 by 30 June 2027. Roughly $5,262 of that is interest (the company’s income) and the rest, about $8,022, reduces the loan. Each later year is worked out the same way from the new balance, that year’s benchmark rate and the years left.

If they pay less. Suppose they repay only $8,000 by 30 June 2027. The shortfall, $5,283.60, is an unfranked deemed dividend for 2026-27 and goes in the director’s own tax return at their marginal rate, while the loan itself continues. A common way to make the repayment without finding personal cash is for the company to declare a dividend and set it off against the repayment by a written agreement. It is still a dividend, taxed as one, but it can carry franking credits, which a deemed dividend usually cannot.

Rates change every year. Check the current one and your figures with your accountant, or with the ATO’s own Division 7A calculator, before acting on them.

Checking yours in Xero

A loan to a shareholder is money the company is owed, so in Xero it should be an asset account, one per person, named something like Loan to Sam Smith (Div 7A). If your file has no such account, ask your bookkeeper or accountant to add one before anything else is coded to it.

1. Open Reports and run the Balance Sheet for today. Find the loan under current or non-current assets. That figure is what you owe the company. How to read your Balance Sheet in Xero explains the layout.
2. Run Account Transactions for that account over the year. Every transfer to you, every personal bill the company paid and every repayment should be there with its date. Your accountant needs this list to sign the agreement before lodgment day.
3. Look for personal spending coded elsewhere. A personal purchase coded to an expense account lowers the company’s profit and hides a Division 7A payment, which is the worst of both. The Xero trial balance shows every account in one place, so an odd balance stands out.
4. Diarise the repayment. The minimum yearly repayment has to land by 30 June, so put it in your cash plan in May. How much can I pay myself? helps you size a salary or dividend that covers it.

Money you take out of the company leaves the bank whether or not it is taxed, so it is one of the reasons a profitable company can be short of cash; profit in Xero but no cash in the bank shows how to find the others.

Common mistakes

• Using the business card for personal spending “to sort out later”. Each payment is caught in the year it is made, and the fix (a complying loan) has to be in place by lodgment day.
• Signing the agreement too late. Once lodgment day has passed, the loan is a deemed dividend for that year and an agreement signed afterwards does not undo it.
• Forgetting the repayment in year two. No repayment is due in the first year, so the first one is easy to miss. The shortfall is taxed in full.
• Charging the wrong rate. The benchmark rate is set for each income year, so a loan made at 8.37% has to charge 8.77% for 2026-27.
• Writing the loan off. A forgiven loan is a deemed dividend in the year it is forgiven.

Common questions

What is the Division 7A benchmark interest rate for 2026-27? 8.77% a year, for the income year ending 30 June 2027. It was 8.37% for 2025-26 and 8.77% for 2024-25. The rate stays fixed for the whole year once the ATO sets it.

When does a Division 7A loan agreement need to be in place? Before the company’s lodgment day for the income year the loan was made: the earlier of the date its tax return is due and the date it is actually lodged.

How is the minimum yearly repayment calculated? The balance owed at the end of the previous income year, times the benchmark rate, divided by (1 − (1 + rate) to the power of minus the years left). For $60,000 with 6 years left at 8.77%, that is $13,283.60.

What happens if I miss a minimum yearly repayment? The shortfall is treated as an unfranked dividend paid to you for that year and is taxed in your own return. The loan continues for the rest of its term.

Does Division 7A apply to sole traders? No. It applies to private companies. A sole trader’s business and the owner are the same person for tax, so money taken out is drawings, not a loan.

Can I repay a Division 7A loan with a dividend? Yes. The company can declare a dividend and set it off against the repayment, with the set-off recorded in writing. It is taxed as a dividend but can carry franking credits.

Seeing it every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: sales and profit against last month and last year, cash in the bank, who owes you and bills due soon. It does not track Division 7A loans or work out repayments, but seeing cash beside profit every week makes money leaving faster than the company earns it hard to miss. It asks Xero for read-only access, and there is a 14-day free trial with no card.