Division 7A Loans & Family Law: What You Must Know in Property Settlements

When a separating couple owns or controls companies (or trusts), Division 7A loans (a tax law concept) can create a “hidden” liability that catches many people off guard in family law property settlements.

In this guide, we’ll explain what Division 7A is, how it interacts with family law, key risks, and practical steps to manage it.

1. What Is Division 7A?

Division 7A is an anti-avoidance provision in the Income Tax Assessment Act 1936.

• The primary aim is to prevent owners of private companies or their associates from withdrawing money from the companies they control as loans, rather than distributing the money as a wage or dividend, to avoid paying tax.

• If a loan doesn’t comply with Division 7A requirements (or is forgiven without proper structure), the ATO may treat the amount as a deemed unfranked dividend, taxable in the hands of the recipient.

A “loan” for Division 7A purposes is broadly defined — it can include advances, providing credit, or facilitating payments.

2. Why Division 7A Matters in Family Law

When you have company structures, trusts, or complex financial dealings, Division 7A can affect how your asset pool and liabilities are calculated in a property settlement.

Here’s how:

• Hidden liabilities: A party may have a company loan (or debt) that’s not obvious but becomes a real liability under tax law. Courts may consider that liability when valuing the net asset pool.

• Order consequences & tax risk: If property or funds are transferred under Family Law Orders (e.g. company to spouse), Division 7A might convert those into deemed dividends, imposing tax consequences.

• Court orders must consider tax effects: A failure to present evidence of the tax implications when seeking orders can lead to reversal on appeal (as the Full Court has done).

One of the key family law decisions addressing Division 7A loans is Rodgers & Rodgers [2016] FamCAFC 68. In this case, the Full Court considered how a Division 7A liability should be treated when preparing the parties’ balance sheet.

The appeal focused on whether the trial judge was correct in refusing to deduct an estimated future tax liability owed by a company controlled by the parties when calculating their net asset pool.

During the marriage, money had moved between the parties’ trust and their company, triggering potential Division 7A consequences. Each party sought orders for the husband to retain the business while the wife was removed and indemnified. This meant the husband would assume responsibility for any future Division 7A tax debt — though at the time of hearing, the liability had not yet arisen and could only be estimated.

The Court examined the different types of liabilities that can appear in property matters — noting that while some, like mortgages, can be precisely calculated, others, such as contingent tax liabilities, are inherently uncertain.

After reviewing earlier authorities, the Full Court confirmed that there is no absolute rule requiring all liabilities to be deducted when determining the net asset pool. Instead, the proper treatment depends on the nature of the liability, its timing, and whether including or excluding it would produce a just and equitable outcome.

Ultimately, the Court held that the uncertain future Division 7A tax liability should be excluded from the asset pool and instead considered later as part of an adjustment under section 75(2) (now section 79(5)) of the Family Law Act 1975.

Practical takeaway:
For separating couples who own or control companies, this case shows that not all potential tax debts — especially uncertain or future Division 7A liabilities — will automatically reduce the asset pool. Instead, the Court may deal with them as an adjustment under Section 79(5) reinforcing the need for early tax advice and precise evidence when negotiating settlements involving company structures.

3. What Makes a Division 7A Loan “Complying”?

To avoid a deemed dividend treatment, a company loan must satisfy specific conditions:

• Be documented by a written loan agreement, established before the company’s lodgment day for that income year.

• Interest must be charged at least at the benchmark interest rate published by the ATO.

• The loan term must not exceed statutory maximums:

  • 7 years for unsecured loans

  • 25 years for secured (mortgage) loans.

• Minimum yearly repayments must be made, reducing the principal over time.

If any of these conditions are breached, the loan (or portion thereof) may be treated as a deemed dividend. .

Also, debt forgiveness (i.e., the company forgiving or waiving the debt) may trigger deemed dividend treatment under the legislation.

4. Practical Steps in Property Settlements Involving Division 7A Loans

When dealing with separation or divorce and corporate / trust structures, here’s what you should do (or ensure is done):

a. Early and full disclosure

Ensure both parties (and their accountants) disclose company structures, shareholder loans, trusts, and any inter-entity debts. The earlier you identify Division 7A issues, the better.

b. Engage accountants / tax experts

You’ll likely need to obtain expert evidence to estimate Division 7A tax consequence. Your family lawyer and tax advisor should collaborate.

d. Structure drafting of Court orders carefully

If the Court is ordering a company to pay or transfer amounts, or forgiving debts, the orders should expressly account for tax treatment under Division 7A. Otherwise the party receiving could be saddled with tax they weren’t expecting.

e. Use complying loan agreements where possible

If a company is going to lend money to a shareholder / associate, make sure the loan is documented and compliant to avoid future damage.

5. Risks & Common Pitfalls

• Failing to identify or disclose a Division 7A loan until late in proceedings

• No written loan agreement, or terms inconsistent with ATO benchmarks

• Seeking orders to transfer assets without considering taxable consequences

• Relying on indemnities alone in Orders— the ATO is not bound by private indemnities

6. Key Takeaway

Division 7A is a significant tax risk in family law property settlements when corporate and trust structures are involved. Without professional tax and legal coordination, a seemingly fair division of assets could leave one party unexpectedly liable for a large taxation bill.

At Wallen Family Law, we help clients in Wollongong and across NSW navigate these complex intersections — ensuring full disclosure, careful structuring, and clarity about who bears risk.

If your separation involves company interests, shareholder loans or trusts, get the right legal + tax advice early to protect your financial future.

Disclaimer: This article provides general information only and should not be relied upon as legal advice. Every family law matter is unique and requires specific legal guidance. Always seek professional legal advice for your specific situation.