Div 7A Loans: A Sneaky Trap That Could Sink Your Business (Unless You Plan Now)
Ah, Div 7A loans or Division 7A loans. On the surface, they seem like a clever little loophole — a way to sneak a few extra dollars out of your company without wearing the hefty tax bill that normally comes with declaring personal income.
Spoiler alert: the ATO is smarter than that. And no matter how slick it looks, they always get their slice of the pie. ALWAYS!
With the end of the financial year looming large, now is the time to tackle your Div 7A loans head-on — not next year, not when you sell the business, and certainly not when it’s too late. Let’s look into the world of Div 7A, why you need to plan now, and how to stop a small loan from becoming a full-blown financial nightmare.
What Is a Div 7A Loan?
In simple terms, a Division 7A loan happens when a shareholder (that’s often you, the business owner) takes money out of a company — without declaring it as income.
Once upon a time, this was a cheeky way to avoid paying personal tax (which can hit upwards of 35%) by keeping profits taxed at the lower company rate (25%).
The ATO, however, is nobody’s fool. Over the years, they’ve put a range of rules in place to clamp down on this. Now, if you pull money out of your company, you have two options:
- Declare it as income or as a dividend and pay the tax now,
or - Set up a formal loan agreement and repay it over seven years — plus interest.
And speaking of interest…
Div 7A Loan Interest Rates Are No Joke Anymore
For a long time, Div 7A loans were relatively “cheap” — sitting around 4–5% interest.
But thanks to rising rates, the current Div 7A benchmark interest rate is 8.77% for the 2024–25 financial year. Yes, you read that right — 8.77%! (That’s more expensive than some mortgages these days.)
So, if you’re thinking of letting your Div 7A loans slide for another year, think again. You’ll be paying a premium to borrow your own money.
How do Div 7A Loans Spiral Out of Control?
Overspending is the typical culprit we see. It often starts innocently enough:
- Cash is a little tight.
- You take a bit out of the company for “just a short while.”
- You forget to pay it back.
- The next year, you do it again… and again.
Before you know it, you have multiple Div 7A loans stacked on top of each other like a Jenga tower of debt. We’ve seen this firsthand — clients coming from other accountants with Div 7A loans rolled over year after year, only to discover when they sell the business, there’s nothing left for them after tax and those loans.
In theory, you “deal with it later.” In reality, “later” means a massive tax bill, serious stress, and, for some, the threat of bankruptcy.
Real Life Case Study: How We Helped “Rodney”
Take our client Rodney (name changed, but the financial headache was real).
Rodney had racked up over $200,000 in Div 7A loans. Despite repeated warnings (and a few strongly worded emails and in-person meetings), Rodney was overwhelmed and ignored the issue for years.
Finally, he reached out for help.
We worked alongside a brilliant commercial mortgage broker to refinance Rodney’s property loan, using the equity to pay off the Div 7A debt at a lower interest rate.
The ATO got their money, Rodney avoided bankruptcy, and we put a realistic repayment plan in place.
Moral of the story? There’s usually a way out — but you need to act before you run out of options.
How to Avoid the Div 7A Loan Disaster
It’s not rocket science — but it does require action.
1. Put yourself on the payroll
Stop treating your company as your personal ATM. Paying yourself wages (or structured dividends) is the best way to ensure you’re pulling money out legally and sustainably.
2. Do a cashflow analysis
You can’t fix what you don’t measure. Knowing exactly how much you need to pay back — and how fast you can do it — is crucial. The goal? Pay off those loans with the least amount of interest possible.
3. Find smarter ways to fund repayments
Depending on your circumstances, consolidating your Div 7A loan debt into a mortgage or structured loan with lower interest could save you thousands. But beware: unsecured personal loans often come with higher rates than Div 7A loan — so choose wisely.
4. Use Div 7A loans only as a short-term fix
Div 7A loans can be a lifeline in an emergency — but it’s not a long-term cashflow strategy. Think of it like using a life raft: you don’t stay in it longer than you have to.
5. Div 7A Loans: Robert T. Kiyosaki or Dave Ramsey?
Some people think of Div 7A loans like “leveraging debt” (Rich Dad Poor Dad mindset). But honestly? In this case, Dave Ramsey has the right idea: get out of debt, and get out fast.
The longer you leave it, the bigger the snowball.
The bigger the snowball, the harder it is to dig yourself out.
Good accountants (like us!) don’t just do your tax return. We work with you to plan, problem-solve, and protect your future wealth. When it comes to Div 7A loans, the best strategy is a simple one:
- Plan ahead.
- Pay it down.
- Protect your future.
If you’re worried about your Div 7A loans — or want to make sure you never fall into the trap — reach out for a Cashflow Health Check
There’s no judgment here. Just smart strategies and a team who genuinely want you to succeed.
Ready to Take Control? Book Your Cashflow Health Check
If you’re serious about getting ahead (and avoiding nasty surprises – like those Div 7A repayments), now’s the time to get proactive.
Our Cashflow Health Check gives you:
✅ A full overview of where your money is going
✅ Clear recommendations on how to be smarter with your cash
✅ Practical steps to improve your financial position
✅ A one-on-one session with Proactive Accounting Principle, Clea, going through everything in detail.
Investment: Only $990 + GST for peace of mind, clarity, and a clear plan forward.
📞 Ready to future-proof your finances?
Contact us today to book your Cashflow Health Check — and start building the business (and life) you actually want.
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