Division 7A: Avoiding Costly Mistakes in Private Companies

Many SMEs operate through private companies, but when funds move between the company and shareholders without proper structure, the ATO’s Division 7A rules can apply. That can turn a simple withdrawal into a taxable dividend. 

The most common traps include:

• Treating company funds as though they are personal cash

• Making shareholder loans without a compliant loan agreement 

• Using the wrong benchmark interest rate — for 2025/26, it’s 8.37% 

Getting this wrong can mean unexpected tax bills, penalties, and interest charges. The ATO recently highlighted these risks in its ‘Division 7A Myths Debunked’ campaign, reminding company owners to review their loan arrangements. 

For SME owners, the solution is clear: formalise all loans with a written loan agreement, apply the correct interest rate, and keep detailed records. A proactive review of your company’s loans now could prevent costly surprises later. 

Division 7A is one of the most common areas where business owners stumble — but with the right guidance, it can be managed smoothly.

 Contact Lockwood & Ward on (02) 9299 7044 or stop by Level 9, 50 Clarence Street, Sydney NSW 2000.