Can Directors Borrow Money from Their Company in Australia?
Company & Director Loans from Hedwig Legal by Jack Meredith.
Directors of Australian companies can borrow money from their company—this is commonly known as a director’s loan. While it’s legal when done properly, there are specific rules and tax consequences to keep in mind. This article explains what a director’s loan is, how it works, and what you should consider before accessing company funds as a director.
What Is a Director’s Loan?
A director’s loan is when a director borrows money from their company. This is different from a salary or dividend. For the loan to be compliant and avoid being taxed as income, it must meet the requirements under Division 7A of the Income Tax Assessment Act 1936 (Cth).
According to the Act, a loan includes:
An advance of money
Credit or financial accommodation
Any transaction that acts like a loan
Example: If your company loans you $10,000 with the expectation that you’ll repay it, that’s considered a loan under the Act.
Legal and Tax Requirements for a Director’s Loan
To avoid having the loan treated as a deemed dividend (and taxed as income), you must meet specific legal and tax conditions:
✅ Loan agreement in writing:
You must have a written agreement in place before your company lodges its annual tax return.
✅ Interest rate:
The interest charged must be at least equal to the Division 7A benchmark rate set by the ATO.
✅ Loan term:
Up to 7 years for unsecured loans
Up to 25 years if secured by a mortgage over real property worth at least 110% of the loan amount
If you fail to meet these requirements or don’t make the minimum yearly repayment by 30 June, the loan may be treated as a dividend and taxed accordingly.
What the Loan Agreement Must Include
The written loan agreement must outline:
The names of the parties (director and company)
The loan amount and repayment terms
The interest rate
The date of the agreement
Signatures of both parties
You’ll also generally need shareholder approval to proceed.
When a Director’s Loan Might Be Appropriate
Borrowing from your company might be suitable if:
Your company has surplus cash not needed for operations
You intend and are able to repay the loan
The loan is relatively modest compared to company assets
When You Should Avoid a Director’s Loan
It’s usually best to avoid taking a director’s loan if:
You plan to use it for personal or lifestyle expenses
Your company has limited cash flow
You are using it to top up insufficient wages
You’re unlikely to repay it on time
Not only can this create tax issues, but it can also affect the company’s financial position and shareholder trust.
Final Thoughts
Director’s loans can be a flexible tool—but only if used correctly. Missteps can lead to unexpected tax liabilities and compliance risks. If you’re considering borrowing money from your company, it’s essential to speak with an accountant or company lawyer before taking action.
If you need help drafting a compliant loan agreement or want clarity on your obligations as a director, Hedwig Legal is here to help.