The top 5 Division 7A myths busted.

Let’s be honest: Division 7A has a bit of a reputation. It’s the part of the tax law that often gets mentioned with a sigh or a raised eyebrow—usually after someone’s been caught out.

Whether you’re a business owner or company director, Division 7A is something you need to understand clearly, because misunderstanding it can cost you. Big time.

The good news? In our latest article, our business advisory team is busting some of the most common Division 7A myths. So read on for the biggest Div 7A traps and practical tips to avoid them.

But first: what is Division 7A?

Division 7A is a tax rule that stops private company profits being taken out by shareholders (or their associates) without paying tax.

If you take money or use company assets for personal benefit—outside of wages, dividends or properly structured loans—the ATO may treat it as a Division 7A dividend, and tax you personally.

Division 7A applies to:

• Loans to shareholders or their associates
• Payments for personal expenses
• Use of company assets (e.g. car, property)
• Forgiven debts
• Some unpaid trust entitlements

Division 7A doesn’t apply to:

• Salary and wages
• Director’s fees
• Properly declared dividends
• Fringe benefits (covered by FBT rules)

Want to learn more? We cover what you need to know about Division 7A here.

Division 7A myths busted. 

Myth #1: The personal piggy bank myth.

“It’s my company—I can use the money however I want.”

Reality:

Not quite. Just because you own the company doesn’t mean you can treat its money like your own personal spending account.

Even if you’re the only shareholder or director, your company is a separate legal entity. That means its money is not your money. If you take funds or assets from it—whether that’s cash, a car, or even paying personal expenses—it could be considered a Division 7A loan. And if that loan isn’t documented and repaid properly, the ATO could treat it as an unfranked dividend, which means you’ll be taxed on it personally.

Myth #2: The informal “loan” myth.

“We’ll just call it a loan and sort it out later.”

Reality:

It’s not enough to label a withdrawal as a “loan” after the fact. To avoid Division 7A issues, you need a formal loan agreement in place by the tax deadline (generally the earlier of your lodgement day or due date for lodgement). It also needs to include:

• A commercial interest rate (set annually by the ATO)
• Minimum annual repayments
• A set maximum term (7 years unsecured or 25 years secured)

Journal entries on their own won’t cut it, and you can’t backdate paperwork. The ATO looks closely at documentation—and intentions.

Miss those repayments—or skip the agreement entirely—and the ATO may treat it as a dividend.

Myth #3: The redraw and repay myth.

“If I repay the money before 30 June, I’m in the clear.”

Reality:

Technically, yes—you may avoid a Division 7A issue if you repay a loan in full before EOFY.

But here’s the catch: the repayment must be genuine.

If you repay the loan in June and then reborrow the money (or something similar) in July—or use money from the company itself to make the repayment—the ATO can deem that repayment to be invalid. And you’ll be taxed as though you never made it.

This includes attempts to cycle money through mortgage offset accounts to save interest.

And remember, these transactions need to be properly recorded. The ATO regularly sees issues here, especially when directors assume they can sort things out at tax time.

Myth #4: Cashless benefits myth.

“Division 7A only applies to cash.”

Reality:

Nope. Division 7A applies to far more than just money in the bank.

It covers any benefit provided by the company to shareholders or their associates, including:

• Use of company assets (like cars, boats, or holiday homes)
• Repayment of personal expenses
• Forgiven debts
• Transferred property
• Unpaid present entitlements from trusts

So even if there’s no cash involved, you could still be caught out.

Myth #5: The accountant-magician myth.

“It’s fine—my accountant will sort it out at year-end.”

Reality:

Good advice is crucial—but it’s not a get-out-of-jail-free card.

If you’ve breached Division 7A and try to rely on advice from a tax professional, the ATO will assess whether your reliance was reasonable—and whether the adviser considered Division 7A at all. If they didn’t? You could still be liable.

Assuming the Commissioner will exercise discretion in your favour is risky. You must apply and meet the conditions for that discretion to be granted.

The truth is, most Division 7A errors are simple and avoidable. The ATO recently flagged the most common ones:

• Forgetting that your company’s money isn’t your money
• Setting up loans without proper agreements
• Using the wrong interest rate when calculating repayments

In short: it pays to stay on top of your Div 7A obligations throughout the year—so speak to your accountant and get the right advice early. It can save you a heap of trouble come tax time.

Want to dive deeper into Div 7A?

The ATO has recently published a detailed explainer that breaks down Division 7A myths—covering business structures, record keeping, and payments to other entities.

👉 Read the ATO’s “Debunking Division 7A Myths” resource.