Chartered Accountant Timothy Quinn leads Tax & Accounting at Lawpath. 16+ years in tax advisory, specialising in startup growth and expansion. Passionate about supporting entrepreneurial clients with early-stage investment incentives, restructuring, international exit strategy planning, and more.
A director’s loan occurs when a director uses personal money to fund company activities and expects a repayment.
Clear classification, records, and regular reconciliation are essential in this situation. This is particularly important in case a loan account later changes direction and creates different tax issues.
- You can usually record personal money advanced to a company as a loan owed to the director or shareholder.
- You can also record any company expenses you paid personally as money that the company owes you.
- Keep evidence of each advance or expense and reconcile the loan account.
- Repaying the loan principal isn’t the same as salary, dividends, or interest.
- If interest is charged, it creates separate tax consequences for both the company and the director.
- Division 7A concerns money moving from a private company to shareholders or associates, so it doesn’t usually apply to this situation.
In this guide, we cover the director’s and company’s obligations, tax treatment, and other implications of lending money to a company.
- What is a director’s loan to a company in Australia?
- Is a director’s loan the same as putting capital into the company?
- What if a director pays company expenses personally?
- Is repaying a director’s loan taxable?
- Can a director charge the company interest?
- Does Division 7A apply when a director lends money to the company?
- Do you need a written loan agreement?
- What is an ‘at-call’ director or shareholder loan to a company?
- Can the company repay the director whenever it has enough cash?
- What happens to the loan if the company cannot repay it?
- What happens to a director’s loan if the company is sold?
- When should you stop funding the company through a director’s loan?
- When should you get accounting or legal advice?
- FAQs
What is a director’s loan to a company in Australia?
A director’s loan to a company is money a director advances to the company with the expectation of repayment.
This can arise where a director:
- Transfers cash into the company bank account.
- Pays a supplier personally.
- Pays registration, software, or professional fees personally.
- Covers company expenses before the business begins earning revenue.
Once the transaction is properly recorded as a loan, it will appear in the company’s accounts as a liability: money owed to the director. It’s not ordinarily company income merely because the company has received funds.
Director’s loan to a company: example
A founder establishes a new Pty Ltd company and takes the following steps:
- Transfers $20,000 of personal money to the company bank account
- Personally pays a $3,000 supplier invoice for company materials
- Records both amounts in the director’s loan account
- The company later repays $10,000
- The company separately begins paying the founder a salary for their work
The result is:
| Transaction | Director’s loan balance |
|---|---|
| Cash advanced to the company | $20,000 |
| Supplier invoice paid personally | $3,000 |
| Total company liability to the director | $23,000 |
| Company repayment | $10,000 |
| Remaining director loan | $13,000 |
The $10,000 is a repayment of loan principal. The latter salary is separate remuneration for work performed and should be recorded and handled separately from the loan account.
Is a director’s loan the same as putting capital into the company?
No. The critical question is whether the company owes the money back.
| Treatment | What it means |
|---|---|
| Loan | The company owes the director money and is expected to repay it. |
| Equity or capital contribution | The director or shareholder contributes money as part of their ownership interest, rather than expecting an ordinary loan repayment. |
It’s vital to agree on how the money is treated when it is advanced to avoid any misunderstandings.
Trying to reconstruct the intention years later can create avoidable uncertainty, especially if there are multiple shareholders, external finance, a business sale, or a tax review.
What if a director pays company expenses personally?
When a director pays a legitimate company expense from personal funds, the company records should show two things:
- The underlying company expense
- The amount the company now owes the director
For instance, a director may personally pay for:
- ASIC or company registration costs
- Software subscriptions
- Insurance
- Legal or accounting fees
- Stock or materials
- Travel incurred for company business
Don’t simply record these as “director drawings”. Instead, keep detailed documentation, including receipts, supplier invoices, bank or card records, expense descriptions, and reimbursement records. Usually, these documents should be kept for at least seven years.
How do you record a director’s loan to the company?
A director’s loan account is a running record of what the company owes the director. If the account later reverses, it will reflect what the director owes the company instead.
You should track:
- The money the director puts into the company.
- The company expenses that the director personally pays.
- Repayments the company makes to reduce the loan balance.
- Interest charged on the loan, recorded separately from the principal balance.
These transactions might look something like this:
| Transaction | Effect on the director’s loan balance |
|---|---|
| The director transfers $10,000 into the company | The company owes the director $10,000 |
| The director pays a $2,000 supplier invoice personally | Amount owed increases to $12,000 |
| The company repays the director $5,000 | Amount owed falls to $7,000 |
What records should you keep for a director’s loan?
Maintain a clear record of:
- The date of each advance
- The amount advanced
- Bank transfer evidence
- Receipts for company expenses paid personally
- The reason for each payment
- The current loan balance
- Repayments made by the company
- Interest charged, if any
- A loan agreement, where appropriate
- Supporting company resolutions where relevant
- Year-end reconciliation with the company accounts
Ultimately, company financial records should explain transactions and the company’s financial position.
Is repaying a director’s loan taxable?
Repaying the principal amount of a director’s loan isn’t the same as a salary, director’s fees, dividends, or interests. Director loan tax treatment is different.
When the company repays the loan, it reduces its liability. However, the company can’t claim a deduction for the principal, and the lender doesn’t need to include it in assessable income.
All other payments to the director should go through the appropriate reporting, taxation, and deductions.
Can a director charge the company interest?
Yes. A director’s loan may be interest-bearing, but it isn’t a requirement. If interest does apply, ensure clarity around:
- The interest rate
- How and when interest is calculated
- Payment frequency
- Repayment terms
- Whether the loan is secured
- What happens if the company cannot repay the loan
Interest and principal don’t fall under the same tax treatment. If the director receives interest, they need to include it in their assessable income. At the same time, the company may be able to claim it as a deduction.
Does Division 7A apply when a director lends money to the company?
No. Division 7A concerns payments from the company to shareholders. When a director lends money to a company, money moves in the opposite direction.
The important nuance is that a director loan account can change direction. If the company pays the director more than it actually owes them or the director borrows money from the company later, the director may end up owing the company money. At that point, different tax issues may arise, and Division 7A may become relevant.
If that occurs, consider whether a Division 7A Loan Agreement and specialist tax advice are needed.
Do you need a written loan agreement?
Not every informal founder advance necessarily needs a formal loan agreement. However, written terms become increasingly useful as the financial, commercial, or relationship risk increases.
A written director loan agreement is particularly useful when:
- The amount is significant.
- Interest is being charged.
- There are multiple directors or shareholders.
- Repayments will occur over several years.
- The company has external investors or lenders.
- The loan is secured.
- There is a risk of disagreement.
- The company may later be sold.
A written agreement can document:
- The lender and borrower
- The amount advanced
- Whether further advances are covered
- Interest terms
- Repayment timing
- Whether repayment is on demand
- Security
- Default consequences
- What happens on a sale, insolvency, or other major event
For a substantial or ongoing arrangement, consider Lawpath’s Loan Agreement templates. For more complex arrangements, you may also need a more personalised contract review.
What is an ‘at-call’ director or shareholder loan to a company?
An at-call loan is broadly a loan without a fixed repayment date that the lender can demand.
For a director loan, this may mean the company owes the director the outstanding balance, but the agreement doesn’t set a fixed instalment schedule. Instead, repayment is due when the lender calls for it, subject to the loan terms and the company’s ability to pay.
Larger or long-running related-party loans can raise accounting, tax, and commercial questions, requiring accounting or tax advice.
Can the company repay the director whenever it has enough cash?
The company needs to follow the loan terms for repayment, so having cash in the bank isn’t the only consideration.
Before making significant repayments, directors should consider:
- Cash needed for tax liabilities
- Wages and superannuation
- Supplier obligations
- Existing debts
- Working-capital requirements
- The company’s solvency
Directors should consider their broader director’s duties and the company’s financial position before committing cash to loan repayments unless they are due.
What happens to the loan if the company cannot repay it?
A director who lends money to the company is a creditor of the company. If the company experiences financial difficulty, repayment may not simply be available on demand.
The director’s position can depend on matters such as:
- Whether the loan is unsecured or secured
- The loan terms
- The company’s other creditors
- Whether security was validly taken
- The company’s financial position and any formal insolvency process
This is a commercial and legal risk worth addressing early, rather than only after the company is under pressure. For secured arrangements, consider whether a general security agreement is appropriate.
What happens to a director’s loan if the company is sold?
An outstanding director or shareholder loan should be identified before a business or company sale transaction.
Possible treatments include:
- Repayment before completion
- Repayment at completion
- Assigning or otherwise dealing with the loan as part of the transaction
- Leaving the loan outstanding under the agreed terms
The sale documents should clearly distinguish between the purchase price for the shares or business and the repayment of money the company already owes to the director.
When should you stop funding the company through a director’s loan?
Director loans can be practical during startup and early trading stages. However, a more deliberate funding and remuneration structure may be needed where:
- Founder advances are becoming substantial.
- Several shareholders are contributing different amounts.
- External investors are joining.
- The business is profitable.
- Directors begin taking regular remuneration.
- The company needs external debt.
- Existing founder loans affect the balance sheet or transaction readiness.
Keep three separate questions in view:
| Question | Possible approach |
|---|---|
| How does the company get funded? | Director loan, equity contribution, or external finance |
| How does the director get repaid? | Repayment of loan principal |
| How does the director get paid for work in the business? | Salary, directors’ fees, or dividends |
This distinction helps prevent a director’s loan account from becoming an indefinite substitute for a proper funding, ownership, or remuneration structure.
When should you get accounting or legal advice?
Consider advice where:
- The loan balance is substantial.
- Interest is charged.
- The loan account changes from credit to debit.
- Multiple shareholders have contributed money.
- There is uncertainty about loan versus equity treatment.
- Repayment may affect the company’s solvency.
- The business is raising capital or being sold.
- Historical transactions are unclear.
- Division 7A may now be relevant.
Lawpath provides comprehensive accounting and tax advice to ensure you and your business stay compliant every step of the way.
FAQs
Can a director lend money to their company?
Yes. A director can advance personal money to their company. If the company is expected to repay it, the amount should be recorded as a liability owing to the director.
How do you record a director’s loan to a company?
Keep a director or shareholder loan account that shows money advanced by the director, company expenses personally paid by the director, repayments, and any interest, separately. Support each entry with bank records, invoices, receipts, and other source documents.
Is a director’s loan repayment taxable?
Repaying a genuine loan principal isn’t the same as a salary, dividends, or interest. The lender doesn’t need to treat principal repayments as income, and the company can’t deduct them.
Can a director charge their company interest?
Yes. Interest may be charged in accordance with the loan terms. Interest does fall under the director’s assessable income, while the company may be able to claim a deduction.
Does Division 7A apply when a director lends money to the company?
Not. Division 7A concerns certain loans, payments, and benefits provided by a private company to shareholders or their associates. A director lending personal money to the company is the opposite direction.
Do you need a written director loan agreement?
A written agreement isn’t necessarily required for every small, informal advance. It becomes more important where the loan is significant, interest-bearing, long-term, secured, involves multiple owners, or may be relevant to a sale, investment, or dispute.
What happens if a director pays company expenses personally?
For genuine company expenses, keep records that show both the underlying expense and the amount the company owes the director.
Is a director’s loan a liability for the company?
Yes. If a director has lent money to the company and the company must repay it, the amount should be recorded as a company liability.
Can a company repay a director’s loan before paying dividends?
A company should pay the loan according to its terms. That said, directors should consider the company’s cash flow, debts, taxes, wages, superannuation, working capital needs, and solvency before making material repayments.
What happens to a director’s loan if the company closes?
In this scenario, the director is essentially a credit. Whether, when, and how much is repaid may depend on the company’s assets, other creditors, any security held, and the relevant winding-up or insolvency process.
