Taking money out of your trust is not the same as taking money out of your bank account. Division 7A exists to stop private company profits being quietly passed to owners as loans that never get repaid.
Why Division 7A exists
The rule treats certain payments, loans and forgiven debts from a private company to a shareholder (or their associate) as an unfranked dividend — taxable in the recipient's hands with no franking credit.
The ATO's concern is simple: profit should be taxed once, through the company, before it reaches the owner. A loan that is never repaid is, in substance, a distribution.
The compliant path
A loan only escapes Division 7A if it sits inside a written loan agreement, signed before the earlier of:
- The due date for lodgement of the company's tax return for the year the loan was made, and
- The actual lodgement date.
The loan must then be repaid on a maximum term — seven years for unsecured loans, or longer if secured over real property — and minimum yearly repayments must be made, with interest at the ATO's benchmark rate.
Where owners get caught
- No written agreement in place before lodgement.
- Repayments missed or topped up the following year.
- Using a new loan to pay off an old one (the ATO sees through this).
- Forgetting that associates — spouses, family trusts, related companies — are caught too.
The structural fix
Division 7A is not a trap you avoid. It is a framework you engineer into your structure before the year ends. We review trust loans every year, put compliant agreements in place, and schedule the minimum repayments so a legitimate loan never accidentally becomes a taxable dividend.
If you've taken money from your company or trust this year and there's no loan agreement in the drawer, that's the conversation to have before lodgement — not after.
