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Division 7A is a set of ATO rules that apply to transactions between private companies and their shareholders or associates. These rules prevent tax-free access to company assets by treating certain transactions as dividends. While Division 7A is outside the scope of BAS Agents, it is still important for bookkeepers to understand how it works, when it applies, and how to flag potential issues for the client’s accountant.
Division 7A is part of the Income Tax Assessment Act 1936. It is designed to stop private company shareholders and their associates from accessing company profits in a tax-free or low-tax way.
Essentially, if a shareholder, director, or associate takes money, assets, or benefits from the company without it being a properly declared dividend, salary, or compliant loan, the ATO can treat it as a “deemed dividend”. This amount then becomes taxable income to the individual at their marginal tax rate.
Division 7A generally comes into play when:
A private company makes a loan, payment, or provides a benefit to a shareholder or their associate.
A company forgives a debt owed by a shareholder or associate.
A company transfers an asset to a shareholder or associate for less than market value (e.g., a motor vehicle).
Loans are not repaid within the required timeframe or not put under a compliant loan agreement.
Example:
If you are a director and shareholder (but not an employee) and you withdraw money from the company or use a company asset (like a car) without recording it properly, the ATO may treat this as an unfranked dividend. That means it is considered untaxed income, which must be declared in your personal return.
Small businesses often fall into Division 7A traps without realising. Some common issues include:
Not keeping accurate records – all loans, payments, and drawings must be properly documented.
Using company money for personal expenses – holidays, personal bills, or cars funded by company money may trigger Division 7A.
Not repaying company loans – loans must be repaid within the ATO’s timeframe (usually 7 years).
No loan agreements in place – without a compliant agreement, the ATO may deem the loan a dividend.
Failing to seek advice – Division 7A is complex and changes often. Mistakes can result in penalties of up to 78% of the loan value.
To avoid penalties and ensure compliance, businesses should:
Set up written loan agreements for any shareholder or associate loans.
Meet minimum repayment requirements each financial year.
Charge commercial interest rates on loans.
Review loans regularly to identify potential Division 7A issues before year-end.
Seek alternative funding options rather than relying on company funds.
Keep up-to-date with legislative changes.
Train staff on identifying potential Division 7A issues in company accounts.
The ATO takes Division 7A breaches seriously. Non-compliance can result in:
Deemed dividends added to the shareholder’s taxable income.
Penalty taxes and interest charges (up to 78% of the loan).
Loss of franking credit benefits for dividends.
Reputational damage to directors and companies.
Legal consequences if breaches are considered a director’s failure in duty.
While Division 7A is outside the scope of BAS Agents, bookkeepers still play a vital role because they process daily transactions. Bookkeepers can:
Flag potential Division 7A transactions (loans, personal expenses, or use of assets) for the accountant’s attention.
Ensure records are complete – all payments, drawings, and loans should be properly documented.
Check entries – verify that transactions are posted correctly (e.g., in Drawings, Loan, or Equity accounts).
Create adjusting journals if directed by the accountant. For example:
Set up an asset account “Director’s Loan Div 7A 20XX”
Post as Debit Loan / Credit Drawings or Director’s Loan Account (money owed back to the company).
Best practice: Continue posting personal drawings into the Drawings (Equity) account during the year, and allow the accountant to make any necessary reallocation or Division 7A adjustments at tax time.
Bookkeepers must be mindful when handling director-related transactions. For clarity:
Drawings Accounts – These are often set up as equity accounts, which makes it unclear whether the company owes money to the director or vice versa. To check, set the account type to Asset and run a Balance Sheet to see if the balance is positive (owed to the company) or negative (owed to the director).
Detailed Memos – Always enter explicit descriptions for major drawings (e.g., “Director holiday expense – to confirm with accountant”).
Communication with Accountant – Discuss unusual transactions with the client’s tax agent before year-end (30 June) to allow sufficient time for adjustments.
Division 7A ensures private companies cannot provide untaxed benefits to shareholders or associates.
Bookkeepers do not advise on Division 7A but should identify, record, and flag potential issues.
Accurate record-keeping, clear communication, and timely review with the accountant are essential to stay compliant.
Ignoring Division 7A can lead to major tax penalties, additional interest charges, and reputational risk.
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