Division 7A Loans: Turning a Common Tax Trap into a Structured, Compliant Solution
Many Australian business owners operate through a private company structure and, quite understandably, draw funds from their company from time to time to meet personal expenses, fund lifestyle costs, or support family commitments.
What many do not fully appreciate is that private drawings from a company can trigger serious and unexpected tax consequences if they are not structured and documented correctly.
This is where Division 7A of the Income Tax Assessment Act frequently comes into play.
The Problem with Informal Drawings
Under Division 7A, a loan, advance or financial benefit provided by a private company to a shareholder or their associate can be deemed to be an unfranked dividend, unless it satisfies strict compliance requirements.
In practical terms, this means that:
money withdrawn informally from a company may be taxed as income;
no cash is received to fund the tax liability; and
interest, penalties and compliance issues can follow.
This is a common issue for successful small and medium business owners — not because of deliberate tax avoidance, but because of poor structuring or incomplete documentation.
A Structured Alternative: Compliant Division 7A Loans
When managed correctly, a properly documented and compliant Division 7A loan can be an effective way to allow business owners to access funds from their company while reducing adverse tax consequences.
Working closely with accountants, one strategy that may be appropriate for some clients is:
documenting the advance as a Division 7A-compliant loan;
ensuring the loan terms meet ATO requirements (including interest rates and repayment schedules); and
securing the loan by way of a registered mortgage over Australian real estate, such as the family home.
When implemented correctly, this approach can provide:
clearer compliance with Division 7A;
greater flexibility around loan terms; and
improved long-term tax outcomes compared to ad-hoc drawings.
How MDL Can Help
At McCarthy Durie Lawyers, we have been assisting a growing number of business owners to regularise and restructure Division 7A loans in a compliant and practical way.
We have developed a suite of high-quality legal documents specifically designed to meet ATO requirements, including:
Division 7A-compliant loan agreements;
registered mortgage documentation over real property; and
supporting security and enforcement documentation.
We are able to deliver the documentation and advice quickly, efficiently, and for an attractive fixed fee, working in tandem with our clients’ accountants to ensure alignment between legal and tax outcomes.
Why Early Advice Matters
Left unattended, Division 7A issues tend to compound over time. What starts as a small, informal drawing can evolve into a significant compliance and tax problem.
Early legal advice allows business owners to:
regain control over historical drawings;
put compliant structures in place going forward; and
reduce stress, uncertainty and future disputes with the ATO.
Need Help with Division 7A Loans?
If you operate through a company and have taken private drawings — or if your accountant has raised concerns about Division 7A exposure — we can help.
