Director Loans and Division 7A Basics for Pty Ltd Founders

When you run your business through a Pty Ltd, the company’s money is not your money. That feels obvious until the company card pays for groceries, or you move A$5,000 to your personal account to cover a bill. Those amounts have to be recorded, and the tax rules for them are stricter than many founders expect.

This guide explains director loan accounts and Division 7A in plain words. Division 7A has many detailed rules and exceptions, so treat this as a starting point and talk to your accountant before you act.

In short

Money you take from your company that is not salary, director’s fees or a declared dividend is usually recorded in a director loan account.
Under Division 7A, a loan from a private company to a shareholder or their associate can be treated as an unfranked dividend.
That generally does not happen if the loan is repaid, or put under a complying loan agreement, by the company’s lodgment day for that year.
A complying loan needs a written agreement, interest at least equal to the benchmark interest rate, a maximum term, and minimum yearly repayments.
The rules are detailed. Ask your accountant early, ideally before 30 June.

What is a director loan account?

A director loan account is a ledger account that tracks money moving between you and your company outside normal salary, fees and dividends. It can go either way:

You owe the company when you take money out or the company pays your personal expenses.
The company owes you when you put your own money in, for example to pay start-up costs before the company had a bank account.

The account nets these off so you can see the balance at any point.

Why the loan account matters

Without a loan account, personal amounts get buried in expense categories or left unexplained. That causes three problems:

Wrong figures. Personal spending recorded as a business expense overstates deductions and may overstate GST credits.
No visibility. You cannot see how much you owe the company until your accountant works it out at year end, when the options to fix it are narrower.
Division 7A exposure. If you owe the company money at year end, Division 7A may apply. The ATO notes that Division 7A dividends can arise by accident when private expenses are not kept separate from company expenses.

The ATO’s guidance on managing Division 7A risks suggests not paying private expenses from a company account, keeping proper records of all transactions with shareholders, and using a written agreement if the company lends you money.

Division 7A in plain words

Division 7A is part of the Income Tax Assessment Act 1936. According to the ATO’s Division 7A overview, it is intended to stop private company profits or assets being provided to shareholders or their associates tax free.

The basic idea: if your private company gives you a payment, a loan, or the use of its assets, and that amount is not already taxed some other way (such as salary, director’s fees or a normal dividend), the tax law can treat it as a dividend. A Division 7A deemed dividend is generally unfranked, so you pay tax on the full amount without the franking credit that would come with a normal franked dividend.

It applies to shareholders and their associates, which can include family members and related entities. Most small company founders are both a director and a shareholder, so it is usually relevant.

Loans and the lodgment day

The ATO’s page on loans and other forms of credit says a loan from a private company to a shareholder or their associate may be treated as a Division 7A dividend unless, by the lodgment day, the loan is:

repaid, or
a complying loan for Division 7A purposes.

The lodgment day is the day the company actually lodges its income tax return for that year, or the due date for lodgment, whichever is earlier. That gives you some time after 30 June to fix things, but the fix itself has to happen by that date.

What makes a complying loan

Based on the ATO’s guidance, a complying Division 7A loan needs all of these:

A written loan agreement in place before the company’s lodgment day for the year the loan was made. There is no set format, but it should identify the lender and borrower, set out the essential terms, and be signed and dated by the lender.
Interest each year at least equal to the Division 7A benchmark interest rate.
A maximum term of 7 years, or 25 years if the loan is fully secured by a registered mortgage over real property that meets a value test.
Minimum yearly repayments in each later income year, made by 30 June of that year.

If a minimum yearly repayment is not fully made, the shortfall is treated as a Division 7A dividend for that year. The interest the company receives is part of its assessable income.

The benchmark interest rate

The benchmark interest rate is set for each income year. It is based on a lending rate published by the Reserve Bank of Australia before the start of that income year, so it changes from year to year. Do not rely on last year’s figure. Check the current rate on the ATO’s Division 7A benchmark interest rate page.

The ATO also has a Division 7A calculator and decision tool that can help work out whether Division 7A applies and calculate the minimum yearly repayment.

A simple worked example

This example is illustrative only and leaves out many details.

Sam is the sole director and shareholder of Sam Software Pty Ltd. During the financial year, Sam transfers A$12,000 from the company account for personal costs. None of it is salary, fees or a declared dividend. At 30 June, the director loan account shows Sam owes the company A$12,000.

Before the company’s lodgment day, Sam’s accountant discusses the options, which may include:

Sam repays the A$12,000 to the company
the company pays Sam a salary or a franked dividend, which is taxed in the normal way and can be used to clear the balance
Sam and the company sign a complying loan agreement, and Sam makes minimum yearly repayments with interest in later years

If nothing is done by the lodgment day, the A$12,000 may be treated as an unfranked dividend in Sam’s hands. The ATO notes that some repayments are not taken into account for Division 7A, so check with your accountant before relying on a particular repayment.

Habits that keep you out of trouble

Use a separate personal card for personal spending
Record any personal amount paid by the company to the director loan account straight away
Record money you put into the company in the same account
Check the loan account balance each quarter, not just at year end
Talk to your accountant before 30 June if the balance shows you owe the company
Keep any loan agreement, and records of repayments and interest, with your company records

Questions

Is it illegal to take money out of my company?

No. But money you take out needs to be recorded properly, as salary, director’s fees, a dividend or a loan. Each is taxed differently, and loans from a company can fall under Division 7A.

What if the company owes me money instead?

Division 7A is mainly about payments and loans from the company to shareholders. If you lent money to the company, the loan account shows the company owes you. Your accountant can confirm how any repayments should be handled.

Can I fix a Division 7A problem after 30 June?

Often, yes, if you act before the company’s lodgment day for that year. The Commissioner can also, in certain circumstances, disregard a deemed dividend or allow it to be franked, for example after an honest mistake. Ask your accountant.

How Foderis helps

Foderis includes a director loan account in its standard Australian chart of accounts, so personal amounts can be recorded as they happen instead of discovered at year end. Bank file import with AI-suggested categories helps catch personal spending each month, and your accountant can be given access to review the balance before 30 June. Foderis is hosted in Sydney and costs A$9 a month, with a 30-day free trial.

This is general information, not tax advice. Your situation may differ: check with your accountant or the ATO.