Search Division 7A online and you’ll get a pretty consistent message. It’s a trap, it’s a headache, it’s the thing that catches business owners out with a tax bill they didn’t see coming. For one version of it, that’s fair. But there’s another version we put clients into on purpose, and it’s one of the more useful tools we set up for the people we look after.
Quick Summary
🎥 Watch the full breakdown, including the real numbers behind how this plays out over 10 years. Watch it here. |
What Division 7A actually is
When money runs through a trust and some of it gets distributed down to a bucket company, that company pays tax at 30 percent, which is usually lower than the top personal rate. The catch is you can’t just leave that money sitting there on paper forever. Eventually you either move the cash across properly or put it on a loan with interest and pay it back over time. That loan is Division 7A.
Most of what gets said about it online is about what happens when this is done carelessly, and honestly, a lot of that criticism is fair. The standard 7 year loan in particular gets used as a way to kick a tax bill down the road without actually saving anything, and that’s a fair call too.
Why the 25 year version is different
There’s a second, much less talked about version of a Division 7A loan, and it works nothing like the 7 year one. It’s secured by a mortgage over real property you already own, often the family home, in the same way a bank secures a mortgage when it lends you money to buy a house. Except here, the lender is your own company.
Once that’s in place, something interesting happens with how the loan actually gets repaid, using money the company has already paid tax on, not new cash pulled from somewhere else. That’s where the right arrangement really starts to work, and it’s exactly what the video walks through, using real figures across a 10 year period.
Where the growth actually happens
The clever part isn’t the loan itself. It’s what happens to the money sitting inside the trust while that loan quietly gets paid down over the years, and what happens years later when that investment has grown and it’s time to sell. There’s a meaningful difference in how much tax is paid depending on whether that growth sat inside a trust or a company the whole time, and it’s a bigger gap than most people expect.
Is there a catch?
For an arrangement that sounds this good, it’s fair to wonder where the risk is hiding. The honest answer is that the underlying risk is low, because the arrangement sits between related entities within your own group. The real risk sits somewhere much more ordinary, and it comes down to whether the paperwork gets done properly every single year.
This only works because the money is sitting in a trust in the first place, which is a bigger conversation on its own. If you’ve seen the headlines about trusts being on the way out, we’ve covered that separately in our trust tax changes article.
🎥 Watch the full video here for the complete walkthrough, the real numbers, and exactly how this gets structured for a client.
Wondering if this could work for you?
Every client’s situation looks different, and an arrangement like this only pays off when it’s set up properly for your circumstances, not copied off a video. If you’ve got money sitting in a bucket company and you’re not sure whether it’s working as hard as it could be, contact the team at Cotchy to learn more and find out what it could look like for you.
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Important: This information is general in nature and is provided for tax, accounting and compliance purposes only. It is not financial product advice. Cotchy does not provide financial product advice or act as a financial planner, and does not hold an AFSL. Consider obtaining advice from an appropriately licensed financial adviser before making decisions about superannuation, investments, borrowing or financial products.
