Division 7A Loans: Why Company Money is NOT Your Personal Money

Updated: April 2026

When you operate your business as a Proprietary Limited (Pty Ltd) company, you create a separate legal entity. One of the most common—and dangerous—mistakes business owners make is treating the company's bank account like their own personal ATM. This triggers a strict ATO tax rule known as Division 7A.

1. What is Division 7A?

Division 7A is a section of the Income Tax Assessment Act designed to stop company directors and shareholders from taking tax-free money out of their company. Because companies pay a lower tax rate (usually 25%) than individuals (up to 45%), the ATO wants to ensure you aren't hiding personal wealth inside the company to avoid paying personal income tax.

If you take money out of the company for personal use (e.g., paying off your personal mortgage, buying a private car, or transferring cash to your personal account), the ATO treats this as a "Division 7A Loan."

2. The "Unfranked Dividend" Penalty

The Double-Tax Trap

If you withdraw company money and do not repay it or put a formal loan agreement in place before the company's tax return is due, the ATO will treat that withdrawal as an unfranked dividend. This means the entire amount will be added to your personal taxable income and taxed at your highest marginal rate, without any franking credits to offset the bill. You effectively pay tax twice!

The Unfranked Dividend Penalty Estimator

Use the slider below to see how a Division 7A breach can destroy your wealth. Compare the personal tax payable on a legal, fully franked dividend versus the ATO's unfranked penalty. (Assumes a base personal income of $100,000 and 25% company tax rate).

Tax if Legal (Fully Franked Dividend)

$4,333

Div 7A Penalty (Unfranked Dividend)

$16,833

3. How to fix a Division 7A issue

If you have already borrowed money from your company, you have two options to avoid the harsh tax penalties before your company tax return is lodged:

  • Repay the money: You can physically transfer the cash back into the company bank account, or declare a fully franked dividend or salary to clear the debt (which you will then pay tax on legally).
  • Set up a Complying Loan Agreement: We can help you set up a formal, written loan agreement between you and your company. Under this agreement, you must make minimum yearly repayments (including principal and interest at the ATO's benchmark rate) over a maximum term of 7 years.

Protect yourself from an ATO Audit

Division 7A compliance is one of the ATO's top audit targets for small to medium businesses. If you frequently use your company card for personal expenses, you are at high risk.

Next Steps: Contact the team at Loyal Bright Accountants today. We can review your director loan accounts, set up complying loan agreements, and help you establish a tax-effective strategy to pay yourself legally.

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