From a business valuation perspective, why do Div 7A loans create particular complexity in family law matters?
Often the parties do not fully appreciate what a Division 7A loan represents. It is more than just a latent tax obligation, as it:
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represents a potential deflation in the value of the ‘equity value’ of the business being valued; and
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it usually causes a misunderstanding of the business’ performance by the party that is not involved in the business.
In simplistic terms, we often see parties assuming a business has more value than it does due to the lifestyle it affords, without realising that the lifestyle is funded by Division 7A loans rather than profits.
It is unfortunately common to observe Div 7A loans along with bank loans or other secured finance, indicating that the funds drawn from the business should have been used to satisfy creditors instead of funding the parties’ lifestyle.
What indicators in the financial records suggest a Div 7A loan exists, even if it has not been clearly disclosed?
In a company structure, a good indication that there may be a debit loan issue is the existence of a loan owing to the company from a shareholder, shareholder’s associates, or other individuals who are not employees of the company. This will show as an asset to the company on the balance sheet.
In a Trust, the indicators are similar to that of a company, where the trustee or an individual has been loaned monies or other benefits (such as private motor vehicle), it will show as an asset in the balance sheet, however a debit loan issue only occurs where there is also a loan or unpaid beneficiary entitlement owing to a company, which will show as a liability payable by the Trust.
In a Partnership, this would only apply in a closely held corporate partnership, or where one of the partners is a company, then the Australian Taxation Office (ATO) may treat it the same as a company structure and the indicators in the financial records are the same as that of a company structure, see the first paragraph above.
The main point of Division 7A is to ensure correct tax is being paid on company earnings and not flowing out to individuals at a tax rate lower than their marginal tax rate.
Which documents are most critical when analysing a Div 7A loan for valuation and forensic purposes?
Written Division 7A Loan Agreements and/or repayment schedules if these are made available.
Similar to tax specialists, the existence of and being provided evidence of any complying Div 7A loan agreement can be critical for forensic accounting purposes.
Notwithstanding this, we are rarely provided a copy of the loan agreement for family law matters, however the existence of this agreement is more important for tax compliance reasons than it is for valuations or investigations.
We can typically infer whether a Div 7A loan is complying from some key indicators. Indicators that it is a complying loan for Div 7A purposes (regardless of viewing a loan agreement) is the existence of dividend repayments in the equity section of the balance sheet, interest income in the profit and loss as part of the repayment of a Division 7A loan, and seeing the loan receivable decreasing from one year to the next. (An increase in the debit loan year on year may be indicative of non-compliance if it is not separated out by the year that the loan commenced).
We raise whether we observe any Div 7A loans so that the parties are informed, and where possible we comment whether they appear to be compliant or not, hence assisting the parties in understanding whether there is likely to be any latent tax obligations that they may need to consider and uninvolved or exiting party to ensure they are protected from through removal as a director and/or shareholder (which can often be overlooked).
How does the existence of a Div 7A loan affect the way you approach valuing a business or interest in an entity?
Div 7A loans do not affect the assessment of a going concern business, hence the business value itself is not impacted. For family law or shareholder dispute purposes however, the underlying equity value of the entity must be considered, and this is where Div 7A loans can have a significant impact on the parties’ interest in equity.
For family law purposes it means a reduction in the overall value that the entity contributes to the asset pool, and in shareholder dispute matters it means a reduction in the entitlement of the relevant shareholder.
Similarly, and something that needs to be considered is that credit loans have an opposing impact on this. They represent an injection to the entity and hence increase the value the entity presents to the asset pool or individual shareholder.
When assessing the property pool, how do you determine whether a Div 7A loan should be treated as a real liability or adjusted for valuation purposes?
As a rule of thumb, we consider Div 7A loans to be real liabilities as they are under tax legislation.
Where we observe a consistent pattern of non-compliance, then we detail this pattern and advise the parties that it may be appropriate to consider this non-compliance and whether it is necessary to consider any latent tax implications due to this as this may be sufficient evidence for the Court to determine no consideration is necessary.
How do courts typically scrutinise expert evidence dealing with Div 7A loans in contested family law matters?
Typically, the Court has freely adopted our evidence and consideration of related party loans.
However, in a recent matter we have had an instance where the Court was unwilling to accept an assessment where we determined that the Division 7A loans were so significant that some of the entities essentially posed a liability to the parties rather than an asset. In this situation it was necessary to restate the values of each entity and present the values in an adjusted way for the Court to understand and accept, even though the net interest of all entities remained unchanged.
What red flags suggest a Div 7A loan may have been created or altered post-separation?
Typically, this is represented through a significant change in the performance of the business and a shift in the general asset structure/position as reported on the balance sheet. Occasionally, it becomes quite obvious when this occurs as the changes are substantial and drastic.
It is unfortunately more common than many would expect, hence we apply professional scepticism when reviewing the financial information provided to us and provide any observations in our reports for the benefit and consideration of the parties and the Court.
What practical guidance would you give lawyers when briefing a valuer or forensic accountant on Div 7A issues to ensure the evidence is useful and defensible?
As the saying goes; ‘the devil is in the details’
Disclosure is a constant and ongoing issue in disputes, contrary to any disclosure obligations, hence the more information that can be provided then the more useful and defensible an opinion or report is.
The best advice I can provide to any lawyer is to ask the hard questions and understand if the documents being provided are the documents that the Expert requests.
Being able to identify whether a loan is potentially a Div 7A loan and asking if a loan agreement exists is the first step to capturing any latent tax issues that need to be considered for a settlement.
Ensuring clients provide the documents an Expert asks for is equally important, because it is unlikely for documents to be requested frivolously. There is always a reason something is requested, and the provision or non-provision it may have a greater impact on an assessment than parties anticipate.
Joshua explores these issues further in the workshop Family Law and Div 7A Intensive 2026. on Thursday, 11 June 2026
In this intensive masterclass you will focus on the following critical areas:
- What is a Div 7A loan and how to recognise it?
- Key indicators of a Div 7A loan
- Which documents should be requested for disclosure?
- Analysis of financials and expert reports – what do the documents reveal?
- The impact of Div 7A on the value of the property pool – a valuer’s perspective
- The impact of Div 7A on a family law settlement – what court orders could be sought?
- Forgiveness of a debt
- Assignment of the Div 7A loan to another party or entity
- The illusion of Div 7A as a funding source for family law action
- Recent FCFCOA decisions on the implications of Div 7A
- Using Div 7A to your client’s advantage
- Scenario and practical application – applying what you’ve learned in practice
Joshua Wheeler, Director & CA Business Valuation Specialist, Munday Wilkinson
Joshua has experience in business services and taxation, as well as in business. He started his accounting career in a Chartered Accounting Firm in Sydney under former Mid-Tier partners, which provided him with hands on experience to large clients from diverse industries. After some years working in business and varying industries, Joshua decided to use his knowledge and experience to return to his passion of Public Practice and joined Munday Wilkinson in 2019. Since then, he has specialised in forensic accounting and is recognised by CA ANZ as a CA Business Valuation Specialist. His expert reports have included forensic investigations, quantification of economic loss, and valuations for businesses in a variety of industries for family law, commercial litigation, shareholder disputes, tax restructuring, and sales and acquisitions. His reports have been used for litigation matters in various jurisdictions including the Federal Court of Australia, Supreme Court of Victoria, Supreme Court of New South Wales, Federal Circuit and Family Court of Australia, County Court of Victoria, and the Victorian Civil and Administrative Tribunal.
