If you’re running a company in Australia - or thinking about setting one up - you may have come across the term “director loan” (sometimes written as “director’s loan”). It can be a practical way to support cash flow or access funds, but it also comes with legal and tax rules you need to get right.
Maybe you’re considering using personal funds to help your business, or you’ve taken money out of the company for personal reasons and want to make sure it’s handled correctly. In this guide, we’ll explain what a director loan is, how it works in Australia, the key compliance rules (including Division 7A), and the documents that help keep things tidy and low risk.
By the end, you’ll understand when a director loan makes sense, how to document it the right way, and the steps to protect both you and the company.
What Is A Director Loan?
A director loan is money that moves between a director and their company outside of salary, wages or declared dividends. That means either:
- The director lends money to the company; or
- The company lends money to the director (or a shareholder/associate).
Even if you’re the sole director and shareholder, the company is a separate legal entity. Money in and out needs to be treated as a formal transaction and recorded properly. Most businesses track this through a “director loan account” in the company’s books.
Common Reasons You Might Use A Director Loan
- Startup funding: You inject personal funds to pay suppliers, marketing or setup costs when external finance isn’t available.
- Short-term cash flow: You cover wages or bills now, with the company repaying you later.
- Personal withdrawals: You take money out for personal use that isn’t a salary or dividend (this is where compliance matters most).
- Flexibility: You want options around timing of drawings and repayments. This is workable, but must stay within legal and tax rules.
How A Director Loan To The Company Works
When you lend money to your company, you’re effectively a creditor of the company. Practically, it looks like this:
- You transfer personal funds into the company bank account.
- The company records it as a liability (a loan payable to you), not revenue.
- You document the terms in a written Loan Agreement (amount, interest if any, repayment schedule, events of default).
- All movements are tracked in a director loan account in the company’s ledger.
You can agree that the loan is repayable on demand or over a set term. If you charge interest, use a reasonable commercial rate and reflect it in the agreement and the accounts.
Should You Secure Your Director Loan?
If you’ve lent a meaningful amount, consider taking security so you sit ahead of unsecured creditors if things go wrong. A common approach is a General Security Agreement (GSA) over the company’s assets, registered on the PPSR (Personal Property Securities Register). Properly registering your security interest helps protect your position if the company later faces insolvency or sells key assets.
Can You Write Off A Loan You Made To The Company?
Yes, a director can forgive (write off) the amount the company owes. Before you do, think carefully about:
- Commercial reality: Once it’s forgiven, you generally can’t get it back.
- Tax effects: Forgiveness may have tax implications for you and the company (for example, potential capital loss treatment and debt forgiveness rules). It’s wise to get specific tax advice before proceeding.
If the company can’t meet debts as they fall due, the board should also consider its solvency resolution obligations and whether restructuring processes are appropriate. Getting advice early can preserve options.
When The Company Lends To A Director: Key Rules (Division 7A)
It’s common for founders in small companies to draw funds from the company for personal reasons. Outside of salary or dividends, that withdrawal is a loan from the company to you - and it triggers special rules under Division 7A of the Income Tax Assessment Act 1936.
Division 7A In A Nutshell
If a private company provides a loan, payment or debt forgiveness to a shareholder or their associate (which can include a director), the ATO may treat it as an unfranked dividend for tax purposes unless it is handled correctly. To avoid that “deemed dividend” outcome, you generally need to either:
- Repay the amount in full by the company’s tax return lodgment day for that year; or
- Put the amount on a complying Division 7A loan agreement by that lodgment day, charge at least the benchmark interest rate, and make the required minimum yearly repayments.
Division 7A is technical and fact-specific. The safest approach is to document any company-to-director loan promptly, ensure the interest rate meets the published benchmark, and keep up with minimum repayments. If you’re unsure how the rules apply to your situation, it’s important to get tailored tax advice.
Directors’ Drawings Vs Director Loans
“Drawings” is an informal term. In a company, if you take money out and it’s not treated as salary (with PAYG and super) or a declared dividend, it is typically treated as a loan - and Division 7A may apply. Good record-keeping and prompt classification will save headaches later.
Is It Legal To Transfer Money From The Company Account To Your Personal Account?
Yes - but only when it’s correctly authorised and documented as one of the following: salary/wages, a declared dividend, reimbursement of genuine business expenses, repayment of a documented loan, or a company-to-director loan that complies with Division 7A. Simply moving money without documentation can lead to director duty issues and adverse tax outcomes.
Legal Risks, Duties And Personal Liability
A company structure offers limited liability, but directors still have legal duties under the Corporations Act 2001 (Cth), including to act in good faith in the best interests of the company, to exercise care and diligence, and to avoid insolvent trading. When loans aren’t managed properly, those duties come into play.
If the company provides a benefit to a director (or related party) and the company receives significantly less value in return, it may be an “unreasonable director-related transaction.” If the company later goes into liquidation, a liquidator can seek to unwind that transaction. This is another reason to document terms clearly and ensure transactions are commercially justifiable.
Preference Payments And Insolvency
Repaying a director-creditor ahead of other creditors shortly before insolvency can be at risk of clawback as an unfair preference if the company enters liquidation. That clawback is a claim against the payee (the creditor who received the payment), not automatic personal liability for directors. However, directors can face personal exposure for insolvent trading or breaches of duty if they allow the company to incur debts when it cannot pay them. Keep an eye on solvency and seek advice early if cash flow tightens.
Personal Guarantees
Separate from loans, directors often sign guarantees for leases, supplier accounts or finance. If the company defaults, a guarantee can make you personally liable. Before signing, understand the scope of any personal guarantees and consider negotiating limits where possible.
What To Document (And Why It Matters)
Paperwork may not be glamorous, but it’s what protects you and keeps you compliant. For any director loan, put simple, clear documents in place and keep the ledger tidy.
Core Documents To Have
- Loan Agreement: A short, written Loan Agreement sets out the amount, interest (if any), repayment schedule, defaults, and whether it’s secured or unsecured. This protects both sides and helps external accountants apply the correct tax treatment.
- Security (optional but recommended for larger loans): If you are lending to the company, consider a General Security Agreement and PPSR registration so you rank as a secured creditor.
- Board approval/resolution: Record the decision to borrow or lend, and the key terms approved.
- Company rules: Make sure your Company Constitution and any Shareholders Agreement allow for director loans and set guardrails (for example, when shareholder approval is required or how conflicts are managed).
Accounting Treatment
- Use a dedicated director loan account in your ledger to record every movement.
- For company-to-director loans, ensure Division 7A compliance each year (benchmark interest and minimum yearly repayments, or full repayment by lodgment day).
- For director-to-company loans, accrue interest (if charged) and recognise repayments correctly.
Work closely with your accountant on tax classification and timing. The legal documents and the accounting entries should match - misalignment is a red flag for auditors and the ATO.
Best-Practice Tips For Managing Director Loans
- Keep company and personal finances separate. Treat every transfer as a transaction with a purpose and paperwork.
- Document early. Put a loan in writing when the funds move (not months later).
- Use commercial terms. If you charge interest, keep it reasonable and consistent with the agreement.
- Follow Division 7A to the letter. For company-to-director loans, have a complying agreement by lodgment day, use the benchmark interest rate, and make minimum yearly repayments.
- Monitor solvency. If cash flow becomes tight, consider your solvency resolution obligations and seek advice promptly.
- Think about priority. If you’ve lent significant funds, consider taking security and registering on the PPSR.
- Be careful with write-offs. Forgiveness and set-offs can have tax effects; get tailored tax advice before changing loan balances.
Practical Examples
You inject $50,000 to launch: The company records a liability to you. You sign a simple Loan Agreement that’s repayable in 24 months with 5% interest. To protect priority, you also take a GSA and register your interest on the PPSR.
You withdraw $15,000 for personal expenses mid-year: Your accountant flags Division 7A. Before the company’s lodgment day, you either repay the $15,000 in full or put it on a complying Division 7A loan with the benchmark interest rate and make the minimum yearly repayments thereafter.
Cash is tight and you want to repay yourself first: Paying back your director loan while other creditors are unpaid could be at risk of clawback if the company becomes insolvent. Consider solvency carefully and get advice on next steps rather than prioritising yourself.
Key Takeaways
- A director loan is money moving between you and your company outside of salary or dividends - and it must be properly documented and recorded.
- Loans from the company to a director are subject to Division 7A: repay by lodgment day or put the loan on a complying agreement with benchmark interest and minimum yearly repayments to avoid a deemed dividend.
- When lending to your company, a clear Loan Agreement - and optionally taking security via a General Security Agreement and PPSR registration - helps protect your position.
- Directors must comply with duties under the Corporations Act and keep an eye on solvency; “preference payments” can be clawed back in a liquidation, and insolvent trading can create personal exposure.
- Align your legal documents, board approvals and accounting entries. Keep company and personal finances separate and paper every transaction.
- Before forgiving loans or making complex set-offs, get specialist tax advice - timing and documentation drive outcomes.
If you’d like a consultation on setting up or documenting director loans for your Australian company, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
