Division 7A for Perth Builders: Are You About to Trigger a Deemed Dividend?

You built the business from the ground up. You started with a ute, a tool belt, and the kind of work ethic that meant 5am starts on a Perth summer morning felt normal. Now your construction company turns over a few million a year, you have a team, and your accountant has set you up with a company structure that keeps things tax-efficient.

Then you get the phone call. Your accountant's voice has that tone. The one that means money is about to leave your pocket.

"We need to talk about Division 7A."

If you're a Perth builder operating through a company - or a trust that distributes to a company - Division 7A of the Income Tax Assessment Act 1936 is one of the most dangerous provisions in Australian tax law. Get it wrong and the ATO will treat money you thought was a loan, a reimbursement, or just normal business as a fully taxable dividend. No franking credits. No deductions. Just a tax bill at your marginal rate.

This post breaks Division 7A down in plain English. We'll walk through the five traps Perth builders fall into most often, show you what compliant looks like with real numbers, and give you a clear action plan if you've already crossed the line.

What is Division 7A? The Plain English Version

Division 7A is a set of anti-avoidance rules in the tax act that stop private company shareholders (and their associates) from extracting money or benefits from the company without paying tax on them.

The logic is straightforward. A company pays tax at 25% (base rate entities) or 30%. If you could just lend yourself the company's money at zero interest, indefinitely, you'd never need to declare a dividend and you'd never pay personal tax on that money. Division 7A closes that loophole.

The Core Rule: If a private company makes a payment, loan, or forgives a debt to a shareholder or their associate, and that amount is not otherwise assessable to the recipient, it is treated as an unfranked deemed dividend.

An unfranked deemed dividend is the worst kind of income. You pay tax at your full marginal rate (up to 47% including Medicare levy) with no franking credit offset. There's no actual cash distribution - just a tax bill.

The word "associate" is critical. It doesn't just mean you, the shareholder. It includes your spouse, your children, your family trust, entities you control, and in some cases, your business partners. The net is wide.

Who Does Division 7A Apply To?

Division 7A applies to every private company in Australia. But it bites hardest in the construction industry because of how builders typically structure their affairs. The classic Perth builder setup looks like this:

• You personally (or your family trust) own shares in a Pty Ltd company.
• The company holds the builder's licence, employs the staff, and runs the jobs.
• Money moves between you and the company regularly - you take drawings, pay personal bills from the company account, use the company ute on weekends, or lend money back and forth.

Every one of those transactions is a potential Division 7A trigger. And in construction, where cash flows are lumpy and project-based, the line between "company money" and "my money" gets blurred fast.

The 5 Division 7A Traps Perth Builders Fall Into

Trap 1: The Director's Loan Account That Got Out of Control

This is the big one. It's responsible for more Division 7A problems than everything else combined.

Here's how it happens. You're the director of your building company. During the year, you take money out of the company for personal use. Maybe it's a transfer to your personal account, cash withdrawals, or paying your home loan from the company. Your bookkeeper or accountant records these as a "director's loan" - money the company has lent to you.

At 30 June, that loan sits on the company's balance sheet as an asset: "Director's loan receivable." And here's where Division 7A bites.

The Rule: If a private company makes a loan to a shareholder or associate, and that loan is not fully repaid by the earlier of the company's lodgement day for that income year or the actual lodgement date, the outstanding amount is treated as an unfranked deemed dividend.

The "lodgement day" is the due date for the company's tax return. For most companies using a tax agent, that's typically 15 May of the following year (for a 30 June year-end).

So if you took $150,000 in drawings during the 2024-25 financial year and haven't repaid it or put a complying loan agreement in place before the lodgement day, the full $150,000 is a deemed dividend. At a 47% marginal rate, that's $70,500 in tax. On money you probably thought was just an advance against future profits.

Real example - Dave the Developer: Dave runs a residential building company in Joondalup. Turnover is $4.2 million. His company made a $380,000 profit in 2024-25. During the year, Dave took $210,000 in drawings for living expenses, a holiday, and a deposit on an investment property. At year-end, his accountant identifies the $210,000 director's loan. Dave has two options: repay the $210,000 before lodgement day (he doesn't have the cash - it's tied up in a project), or put a complying loan agreement in place, converting the amount to a Division 7A loan with minimum annual repayments and a benchmark interest rate. Dave chooses option 2.

Trap 2: Using Company Assets for Private Purposes

Division 7A doesn't just catch cash loans. It also catches the private use of company assets. In construction, this almost always means vehicles, but it can also include boats, holiday houses, and equipment.

The provision is Section 109CA of the ITAA 1936. If the company's asset is used by a shareholder or associate for private purposes, and the company hasn't been "adequately compensated," it's a deemed dividend equal to the arm's length value of the use.

For Perth builders, the classic scenario is the company-owned dual cab. It's on site Monday to Friday. But on Saturday it tows the boat to Mandurah and on Sunday it does the Bunnings run. That private use has a Division 7A value - typically calculated by the operating cost method (private km / total km × total running costs) or the statutory rate (20% of the car's original cost). Your accountant should assess which method produces the lower figure and whether FBT already covers the exposure.

The interaction with Fringe Benefits Tax (FBT) is important here. If the company is already paying FBT on the vehicle's private use, Division 7A doesn't apply to the same benefit - you can't be taxed twice. But many builders either don't have an FBT return or have under-reported the private use percentage. That gap is where Division 7A steps in.

Trap 3: Personal Expenses Paid by the Company

This one is insidious because it often happens without the builder even realising. The company credit card gets used for personal groceries, school fees, or a family dinner. The company pays the home internet bill because "you work from home sometimes." The company pays for a family holiday because "there was a conference nearby."

Every single one of those payments is either a loan to you (if recorded as a director's loan and subject to Division 7A loan rules), or a payment to you (if not recorded as a loan, it's an immediate deemed dividend under Section 109C).

The distinction matters. A payment is worse than a loan because you can't fix it retroactively with a loan agreement. Once a payment has been made and the income year has ended, it's a deemed dividend. Full stop.

The fix is brutal in its simplicity: keep personal and company expenses completely separate. Separate bank accounts. Separate credit cards. No exceptions. If you accidentally use the company card at Coles, reimburse the company immediately and document it.

Trap 4: Unpaid Present Entitlements (UPEs) - The Hidden Killer

This is the trap that catches sophisticated structures, not just sole-trader-turned-company setups. If you operate through a family trust that distributes income to a corporate beneficiary (the "bucket company"), you need to understand Unpaid Present Entitlements.

Here's the setup. Your family trust earns $500,000 in construction profits. The trustee resolves to distribute $200,000 to your company (the corporate beneficiary) to cap the tax at 25%. But the trust doesn't actually pay the $200,000 to the company. The money stays in the trust, or more commonly, it's already been spent by the trust on other things. That unpaid distribution - the $200,000 the company is "entitled to" but hasn't received - is the UPE.

ATO Position on UPEs: Where a trust has a UPE in favour of a private company, and the trust uses those funds for the benefit of a shareholder or associate of the company, Division 7A applies as if the company had made a loan to that individual. The UPE must either be repaid to the company, placed on a Division 7A complying loan, or sub-trust arrangements put in place - by lodgement day.

This is an absolute minefield for Perth builders who use the common trust-to-company distribution strategy. The trust distributes to the company to access the 25% tax rate, but the money stays in the trust to fund the builder's drawings, mortgage payments, or lifestyle. The ATO sees that as the company lending money to the builder, via the trust, and Division 7A applies.

UPE worked example: The Smith Family Trust earns $600,000 from building contracts in 2024-25. The trustee distributes $200,000 to Smith Building Pty Ltd (taxed at 25% = $50,000), $200,000 to Mr Smith and $200,000 to Mrs Smith personally. The trust doesn't pay the $200,000 to the company; instead, Mr Smith takes $180,000 in drawings from the trust during the year. At 30 June, the company is owed $200,000 (the UPE), and Mr Smith effectively has the money. Under the ATO's approach, Division 7A treats this as a $200,000 loan from the company to Mr Smith. Unless a complying loan agreement is in place by lodgement day, Mr Smith has a $200,000 deemed dividend on top of his existing assessable income. The additional tax at 47%: $94,000 - on money he thought had already been dealt with through the trust distribution.

Trap 5: The Intercompany Loan Nobody Documented

Many builders end up with multiple entities - a trading company, a property holding company, a trust or two. Money flows between them constantly. The company pays a bill that belongs to the trust. The property entity borrows from the trading entity to fund a settlement.

Every one of these intercompany transactions is a potential Division 7A problem if the entities have common shareholders or associates. And the fix is the same: the amount must be repaid before lodgement day or a complying loan agreement must be put in place.

The issue is that most builders (and honestly, many accountants) don't track intercompany balances with the precision Division 7A demands. It's not until tax time that someone reconciles the accounts and finds a $300,000 intercompany loan that's been sitting there for three years with no agreement, no interest, and no repayments. That's three years of deemed dividends.

How to Stay Compliant: The Division 7A Playbook

There are really only three compliant outcomes for any Division 7A transaction:

1. Repay the full amount before lodgement day. The loan or payment is squared away. No Division 7A issue.
2. Declare a dividend equal to the amount. The company formally declares a dividend. If franking credits are available, the tax hit is reduced. But you still pay tax.
3. Put a complying loan agreement in place. This is the most common approach for larger amounts.

What Makes a Loan Agreement "Complying"?

A Division 7A complying loan agreement has strict requirements set out in Section 109N. Miss any one of these and the agreement is non-complying, which means the entire balance is a deemed dividend. The requirements are:

• The agreement must be in writing. A handshake doesn't cut it.
• The agreement must be in place before lodgement day. For a 30 June 2025 year-end with a tax agent, that's typically 15 May 2026. Do not miss this date.
• Interest must be charged at the ATO benchmark rate. For the 2024-25 income year, the benchmark rate is 8.27%. This rate changes annually.
• Minimum yearly repayments must be made. The loan is amortised over a maximum of 7 years (unsecured) or 25 years (secured against real property). Minimum annual repayments of principal and interest must be made by 30 June each year.
• No extension beyond the maximum term. 7 years unsecured, 25 years secured. No rollovers, no extensions.

Complying loan worked example: Dave's $210,000 director's loan, secured against his home: principal $210,000, benchmark rate 8.27%, maximum term 25 years, Year 1 minimum repayment $21,282 (approx. $17,367 interest and $3,915 principal). That's $21,282 Dave must physically pay to the company by 30 June each year. The interest is assessable income to the company; Dave cannot deduct the interest unless the original loan was used for an income-producing purpose. If Dave misses the minimum repayment by even $1, the entire shortfall is treated as a deemed dividend for that year.

Key point: the interest rate is not optional. You cannot charge a lower rate than the ATO benchmark, even if commercial rates are lower. The rate is set as the RBA indicator lending rate for small business (variable) as at the start of the income year.

What to Do If You've Already Breached Division 7A

Step 1: Quantify the Exposure

Work with your accountant to identify every transaction that triggers Division 7A. Go back through the loan accounts, intercompany balances, and trust distribution minutes. Identify the year each transaction occurred and whether the lodgement day has passed.

Step 2: Assess Whether Voluntary Disclosure Is Appropriate

The ATO has a voluntary disclosure regime. If you come forward before the ATO contacts you, penalties are significantly reduced - typically from 75% of the tax shortfall down to as low as 0-10% in genuine voluntary disclosures where there's no evidence of intentional disregard.

For a $200,000 deemed dividend at a 47% marginal rate, the tax shortfall is $94,000. The difference between a 75% penalty ($70,500) and a 0% penalty is life-changing. Voluntary disclosure is almost always the right call.

Step 3: Amend Returns and Put Agreements in Place

You cannot put a complying loan agreement in place retrospectively for a year where the lodgement day has already passed. That deemed dividend stands. But you can prevent ongoing years from creating additional deemed dividends by putting agreements in place now and ensuring the minimum repayment schedule is met going forward.

Step 4: Consider Whether a Dividend Declaration Solves It

If the company has sufficient retained earnings and franking credits, it may be better to declare a fully franked dividend equal to some or all of the loan balance. On a $200,000 amount: an unfranked deemed dividend costs $94,000 in tax at 47%; a fully franked declared dividend (grossed up to $285,714, taxed at 47% = $134,286, less the $85,714 franking credit) costs $48,572 net. The franked dividend saves $45,428. That's a new ute. The lesson: franking credits are your best friend when dealing with Division 7A problems.

Structure Optimisation: Getting It Right from the Start

Strategy 1: Pay Yourself a Proper Salary

The most reliable way to extract cash from your company without Division 7A issues is to pay yourself a salary. Yes, you'll pay PAYG withholding, super, and payroll tax (if applicable). But the amount is a deductible expense to the company, you're receiving assessable income, and there's no Division 7A issue. A salary of $200,000 to $300,000 (depending on the company's profitability) covers most builders' living expenses and keeps the loan account clean.

Strategy 2: Declare Regular Dividends

If the company has profits and franking credits, consider declaring interim or final dividends throughout the year. Board minutes documenting the dividend declaration are essential. For builders with a 30 June year-end, consider declaring a dividend before year-end to offset any loan account balance.

Strategy 3: Manage Trust Distributions Carefully

If you use a family trust, the UPE issue means you need to be disciplined about actually paying distributions to the corporate beneficiary. Don't just distribute on paper - move the money. Alternatively, consider whether distributing to the company is even the right strategy; for some builders it may be better to distribute entirely to individuals (accepting the higher marginal rate) and avoid the UPE trap altogether.

Strategy 4: Separate Business and Personal Banking Completely

This is non-negotiable. Your company needs its own bank accounts and credit cards. Every personal expense must be paid from personal funds. If company money ever hits your personal account, it must be documented immediately as a salary payment, dividend, or loan (with a complying agreement). Set up a regular salary or dividend payment as an automatic transfer.

Strategy 5: Quarterly Loan Account Reviews

Don't wait until tax time to find out there's a $250,000 director's loan problem. Review the director's loan account balance quarterly - at minimum. A 15-minute review at the end of each quarter can save you $50,000 or more in deemed dividend tax.

Proposed Division 7A Reforms: What's Coming

The Board of Taxation reviewed Division 7A and recommended simplification. Key proposals include a single 10-year loan term for all complying loans (replacing the 7/25 year split), simplified rules for UPEs, and safe harbour provisions for minor breaches. These reforms have been deferred multiple times - the start date has been pushed back to income years commencing on or after 1 July 2026 at the earliest, subject to legislative progress. The existing rules apply in full until then. Don't wait for the reforms: if you have a Division 7A issue today, it needs to be addressed under today's rules.

Your Division 7A Compliance Checklist

• Director's loan account balance is $0 or in credit at 30 June
• All existing Division 7A loans have written complying loan agreements
• Minimum annual repayments have been made on all complying loans by 30 June
• Interest on complying loans has been calculated at the benchmark rate and included in the company's income
• No personal expenses have been paid from company funds without reimbursement or proper documentation
• Private use of company assets has been identified and either FBT-reported or Division 7A-assessed
• Trust distributions to corporate beneficiaries have been physically paid (no UPEs outstanding)
• Intercompany loan balances have been reviewed and agreements put in place where required
• Board minutes document all dividend declarations during the year
• Salary and super payments to working directors are current and correctly reported

The Bottom Line

Division 7A isn't going away. If anything, the ATO is getting better at catching breaches through data matching, trust distribution analysis, and real-time BAS data. The construction industry is one of the ATO's priority compliance areas, and Perth's building boom means there are more company structures, more cash flowing, and more opportunities for things to go wrong.

The good news is that Division 7A is entirely manageable if you're proactive. Pay yourself properly, keep your loan accounts clean, physically move trust distributions, and review your position quarterly. The builders who get into trouble are the ones who ignore the problem until their accountant finds it in March.

If you're a Perth builder and any of this sounds familiar, the time to act is now - not in June. Get your loan accounts reconciled, get your agreements in place, and make sure your structure is working for you, not against you.

Frequently Asked Questions

My accountant says my loan account is "in debit." What does that actually mean?

It means you owe money to the company. You've taken more out than you've put in. Every dollar sitting in that debit balance at 30 June needs to be either repaid, declared as a dividend, or covered by a complying loan agreement. If you hear "in debit," treat it as a flashing red light.

Can I just journal the loan account down by declaring a dividend at year-end?

Yes, but only if the company has sufficient retained earnings to support the dividend, with proper board minutes, declared and credited before the lodgement day. If the dividend is franked, the company must have sufficient franking credits; if it's unfranked, the tax cost to you personally is the same as a deemed dividend - so you haven't gained anything. The strategy only works when franking credits are available.

What if I lend money TO the company? Does that offset my drawings?

Yes, to an extent. The director's loan account is a running balance. If you put $100,000 of personal funds into the company and later take $80,000 out, your net position is a $20,000 credit. But be careful: the ATO looks at the highest balance during the year in some circumstances, and if the account fluctuates significantly you may still have a problem for the period it was in debit. Keep detailed records of every transaction and the dates they occurred.

Does Division 7A apply if my company has no distributable surplus?

Section 109Y limits the deemed dividend to the company's "distributable surplus" - essentially its accumulated profits plus certain amounts. If the company has no distributable surplus, the deemed dividend is limited to that amount, which could be nil. However, don't rely on this as a planning strategy - the calculation is complex, the ATO may challenge your figures, and losses can reverse quickly in construction. It's much safer to manage the loan account properly.

My builder's licence is held by the company but I sometimes do side jobs personally. Is that a Division 7A issue?

Potentially, yes. If you're using the company's builder's registration, insurance, or reputation to earn personal income, the ATO could argue the company is providing you with a benefit. More importantly, if income that should belong to the company is diverted to you personally, there are broader issues beyond Division 7A - including Part IVA and potential registration issues. Keep the company's business and your personal affairs completely separate.

What's the penalty for getting Division 7A wrong?

The deemed dividend itself creates assessable income taxed at up to 47% with no franking credits. On top of that: shortfall interest charge (currently around 11.36% per annum, compounding) and administrative penalties of 25% of the shortfall for "failure to take reasonable care," 50% for "recklessness" and 75% for "intentional disregard." Voluntary disclosure before the ATO contacts you can reduce penalties to nil in some cases. On a $300,000 deemed dividend outstanding for three years, total exposure can easily exceed $200,000.

Why Construction Is the ATO's Division 7A Hunting Ground

Lumpy cash flows. Construction cash flows are project-based and irregular. During lean periods, directors dip into the company account for personal expenses with every intention of "putting it back later." Those interim drawings create Division 7A exposure that often isn't resolved by year-end. The feast-and-famine cycle is the enemy of clean loan accounts.

Mixed-use assets. Builders use company-owned vehicles, tools, and equipment that naturally cross the personal-business boundary. Each creates a Division 7A exposure if not properly managed through FBT or director reimbursement.

Complex structures. By the time turnover reaches $3-5 million, most Perth builders have a family trust, a trading company, a property holding entity, and sometimes a self-managed super fund. Each entity-to-entity transaction is a potential Division 7A event.

The "my money" mindset. Builders who've built their business from scratch understandably see the company's cash as their own. But legally, the company is a separate entity. The mindset shift from "it's my money" to "it's the company's money and I need a compliant reason to take it" is the single most important thing a builder can do to avoid Division 7A problems. Once that clicks, everything else falls into place.

Disclaimer: This blog post is general information only and does not constitute tax, legal, or financial advice. Division 7A is complex and fact-specific. Always consult a qualified tax professional before acting on any information in this article. Tax rates and thresholds referenced are for the 2024-25 income year and may change.